Parallel Imports, Product Quality and Endogenous Trading Bloc Formation

Sunandan Ghosh ()
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Sunandan Ghosh: Centre For Development Studies

Economics Bulletin, 2018, vol. 38, issue 3, 1415-1427

Abstract: This paper analyzes the role of parallel imports (PIs) in determining both optimal product quality and optimal trade policy. We consider a three country world economy, where poor (P) and middle-income (M) countries import a vertically differentiated good produced and exported by a patent holder monopolist in the rich country (R), when PIs are allowed. In presence of both inter and intra-country taste diversity, PIs lower the level of innovation irrespective of tariff regimes vis-Ã -vis when PIs are not allowed. The optimal tariff levels imposed by the importing countries are lower under PIs irrespective of the tariff regimes. Formation of a Free Trade Area (FTA) by R is feasible with side-payments to its FTA partner given intra-country taste diversity. A customs union (CU) among the importing countries turns out to be globally Pareto superior given both inter and intra-country taste diversity. The level of innovation is highest under such CU as compared to all other tariff regimes.

Keywords: Parallel Imports; Endogenous Product Quality; Trading Bloc; Intra-country Taste Diversity (search for similar items in EconPapers)
JEL-codes: F1 L1 (search for similar items in EconPapers)
Date: 2018-07-18
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