Parallel Trade, International Exhaustion and Intellectual Property Rights: A Welfare Analysis

Stefan Szymanski and Tommaso Valletti

No 5022, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper analyses the issue of parallel trade (arbitrage) for products protected by intellectual property rights. Many countries have traditionally allowed owners of intellectual property rights to prohibit arbitrage in the face of international price discrimination. In a well-known paper Malueg and Schwartz (1994) showed that this policy decreases social welfare when the same markets are served in both regimes, with and without arbitrage. Their model considered only the setting of prices, and not investment in product development. We consider a two-stage game where firms choose quality first and then prices. Since the threat of arbitrage ex post reduces the incentive to invest ex ante, the net benefits of parallel trade may vanish. We also show that the size of the welfare effects is significantly affected by the presence of a ?generic? product, which represents a form of competition for the monopolist. The monopolist will introduce a ?fighting brand? to compete with the generic, which dilutes but does not eliminate the result on the adverse effects of parallel trade on investments.

Keywords: Parallel trade; Price discrimination; Investments (search for similar items in EconPapers)
JEL-codes: F13 L12 O34 (search for similar items in EconPapers)
Date: 2005-04
New Economics Papers: this item is included in nep-int
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Related works:
Journal Article: PARALLEL TRADE, INTERNATIONAL EXHAUSTION AND INTELLECTUAL PROPERTY RIGHTS: A WELFARE ANALYSIS* (2006)
Working Paper: Parallel Trade, International Exhaustion and Intellectual Property Rights: A Welfare Analysis (2006)
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