An Analysis of the Welfare Effects of Parallel Trade Freedom

Frank Müller-Langer
Additional contact information
Frank Müller-Langer: University of Heidelberg
Authors registered in the RePEc Author Service: Mueller-Langer

No 2008-1-1225, German Working Papers in Law and Economics from Berkeley Electronic Press

Abstract: In a double marginalization model which is played between a domestic monopolistic manufacturer of pharmaceuticals and a foreign exclusive distributor, I examine the impact of parallel trade freedom on the manufacturer's profit. I also analyze its impact on global welfare for low, intermediate, and high trade costs and different levels of heterogeneity of the two countries where the manufacturer and the distributor are located.The model suggests that parallel trade - provided that it is a credible threat - reduces the profit of the manufacturer and thus reduces his incentives to invest in R&D. If, however, trade costs are high, parallel trade is a non-credible threat as it is not a worthwhile business activity for the foreign distributor and thus does not have any impact on the profit of the manufacturer.The model shows that parallel trade has positive welfare properties if the two countries are sufficiently heterogeneous in terms of market size and if trade costs are intermediate and low, respectively. If, however, the countries are virtually homogenous in terms of market size, parallel trade may be detrimental to global welfare for specific levels of trade costs.

Keywords: parallel trade; pharmaceuticals; R&D incentives; welfare effects; economic (search for similar items in EconPapers)
Note: oai:bepress:
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.bepress.com/cgi/viewcontent.cgi?article=1225&context=gwp (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bep:dewple:2008-1-1225

Access Statistics for this paper

More papers in German Working Papers in Law and Economics from Berkeley Electronic Press
Bibliographic data for series maintained by Christopher F. Baum ().