Parallel trade and its impact on incentives to invest in product quality

Giorgio Matteucci () and Pierfrancesco Reverberi ()
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Giorgio Matteucci: Dipartimento di Informatica e Sistemistica "Antonio Ruberti" Sapienza, Universita' di Roma
Pierfrancesco Reverberi: Dipartimento di Informatica e Sistemistica "Antonio Ruberti" Sapienza, Universita' di Roma

No 2011-05, DIS Technical Reports from Department of Computer, Control and Management Engineering, Universita' degli Studi di Roma "La Sapienza"

Abstract: It is widely argued that international arbitrage, or parallel trade (PT), trades off static against dynamic efficiency so that, compared with a national exhaustion regime of intellectual property rights, worldwide consumer surplus rises at the expense of R&D investment. We show that this common wisdom is rather the exception than the rule. Indeed, quality investment often rises under international exhaustion, since it strengthens vertical differentiation between the original product and parallel imports. In this case, there is no trade-off at all, so that encouraging PT improves welfare, or the reverse trade-off occurs where investment increases and consumer surplus declines, while PT has ambiguous welfare effects. We find that, when allowed to use dual pricing, the R&D firm artificially restores national exhaustion. We also find that the expected trade-off never occurs under non-linear pricing and when the foreign country is regulated, although in such cases welfare rises when PT is banned.

Keywords: Parallel trade, Intellectual Property Rights; R&D investment, Vertical contract; Regulation (search for similar items in EconPapers)
JEL-codes: F15 L12 L43 O34 (search for similar items in EconPapers)
Date: 2011-05
New Economics Papers: this item is included in nep-com, nep-ino, nep-int, nep-ipr, nep-pr~ and nep-tid
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