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

36 Pages Posted: 24 Aug 2005

See all articles by Stefan Szymanski

Stefan Szymanski

Imperial College London - Imperial College of Science, Technology and Medicine

Tommaso M. Valletti

Imperial College Business School; Centre for Economic Policy Research (CEPR)

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Date Written: April 2005

Abstract

This paper analyzes 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

JEL Classification: F13, L12, O34

Suggested Citation

Szymanski, Stefan and Valletti, Tommaso M., Parallel Trade, International Exhaustion and Intellectual Property Rights: A Welfare Analysis (April 2005). CEPR Discussion Paper No. 5022. Available at SSRN: https://ssrn.com/abstract=772792

Stefan Szymanski

Imperial College London - Imperial College of Science, Technology and Medicine ( email )

Exhibition Road
London, SW7 2AZ
United Kingdom
+44 20 7594 9107 (Phone)
+44 20 7823 7685 (Fax)

Tommaso M. Valletti (Contact Author)

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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