An Analysis of the Ambiguous Welfare Effects of Parallel Trade Freedom

Revised version published under the title "Parallel Trade and its Ambiguous Effects on Global Welfare", Review of International Economics, 2012, Vol. 20, No. 1, 177-185.

Max Planck Institute for Intellectual Property, Competition & Tax Law Research Paper No. 10-03

29 Pages Posted: 8 Mar 2010 Last revised: 25 Jan 2013

See all articles by Frank Mueller-Langer

Frank Mueller-Langer

University of the Bundeswehr Munich; Max Planck Institute for Innovation and Competition; European Commission, Joint Research Center

Multiple version iconThere are 2 versions of this paper

Date Written: January 12, 2010

Abstract

The regulation of parallel trade has become a critical issue in the global trading system, as the welfare effects of parallel trade freedom are generally ambiguous. In this paper we investigate the welfare effects of parallel trade freedom for low, intermediate, and high trade costs and different levels of market size. By analyzing a game played between a domestic monopolistic manufacturer of pharmaceuticals and a foreign exclusive distributor we, first, show that parallel trade reduces the profit of the manufacturer and his incentives to invest in R&D. In addition to this first finding, we show, secondly, that the question as to whether parallel trade freedom has positive or negative welfare properties depends on the level of trade cost and the heterogeneity of countries in terms of market size. In particular, we find that parallel trade freedom has a positive effect on global welfare if countries are sufficiently heterogeneous in terms of market size and if trade costs are intermediate and low, respectively. Surprisingly, this result even holds in a situation where parallel trade freedom implies the closure of the smaller market. If, however, countries are virtually homogenous in terms of market size, parallel trade freedom may be detrimental to global welfare for specific levels of trade costs.

Keywords: Parallel Trade, Welfare Effects, Pharmaceuticals, Intellectual Property Rights

JEL Classification: L43, L51, O34

Suggested Citation

Mueller-Langer, Frank, An Analysis of the Ambiguous Welfare Effects of Parallel Trade Freedom (January 12, 2010). Revised version published under the title "Parallel Trade and its Ambiguous Effects on Global Welfare", Review of International Economics, 2012, Vol. 20, No. 1, 177-185., Max Planck Institute for Intellectual Property, Competition & Tax Law Research Paper No. 10-03 , Available at SSRN: https://ssrn.com/abstract=1535188 or http://dx.doi.org/10.2139/ssrn.1535188

Frank Mueller-Langer (Contact Author)

University of the Bundeswehr Munich ( email )

Munich
Germany

Max Planck Institute for Innovation and Competition ( email )

Munich
Germany

European Commission, Joint Research Center

Seville
Spain

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