Strategic Competition and Optimal Parallel Import Policy

Kamal Saggi () and Santanu Roy

No 1117, Vanderbilt University Department of Economics Working Papers from Vanderbilt University Department of Economics

Abstract: This paper shows that parallel import policy can act as an instrument of strategic trade policy. We demonstrate this result in two-country international duopoly where a domestic monopolist competes with a rival firm in the foreign market if it chooses to incur the fixed investment cost of exporting. The two firms sell horizontally differentiated goods and compete in prices. When the foreign market is significantly larger than the domestic one, the home firm gains if it is unable to price discriminate; its desire to not deviate too far from its optimal monopoly price in the domestic market makes it (credibly) less aggressive in price competition abroad which softens price competition and raises profits. On the other hand, when the foreign market is not significantly larger, it is optimal for the home country to forbid parallel imports since international price discrimination yields higher profits to the home firm. We draw out the implications of the two types of parallel import policies for global welfare.

Keywords: Parallel Imports; Exports; Trade Policy; Oligopoly; Horizontal Product Differentiation; Market Structure; Welfare (search for similar items in EconPapers)
JEL-codes: F10 F13 F15 (search for similar items in EconPapers)
Date: 2011-09
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http://www.accessecon.com/pubs/VUECON/vu11-w17.pdf First version, September 2011 (application/pdf)

Related works:
Journal Article: Strategic competition and optimal parallel import policy (2012)
Journal Article: Strategic competition and optimal parallel import policy (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:van:wpaper:1117

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