Parallel Trade, Price Discrimination, Investment and Price Caps

44 Pages Posted: 6 Nov 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)

Abstract

Parallel trade is the resale of a product by a wholesaler in a market other than that intended by the manufacturer. One of its consequences is that manufacturers may be prevented from price discriminating between markets that have different willingness to pay for the product in question. Some legal regimes give the manufacturer the right to prohibit parallel trade, but others do not. We examine the policy implications of parallel trade in a world in which manufacturers invest in product quality, and have the possibility to develop different quality variants of their goods. We also consider the possibility that the authorities may impose price caps and compulsory licensing (as commonly occurs for some pharmaceutical products). We find that taking investment incentives into account makes parallel trade much less likely to enhance overall welfare, which implies that parallel trade in products intensive in R&D, such as pharmaceuticals, is less desirable than in fields such as branded consumer products. We also find that, somewhat surprisingly, the threat of parallel trade does not induce firms to market inferior versions of their products in poor countries. However, parallel trade is less likely to be detrimental to welfare when there are price caps, since compulsory licensing can mitigate the major cost of parallel trade (namely a refusal to supply a poor country market).

Suggested Citation

Szymanski, Stefan and Valletti, Tommaso M., Parallel Trade, Price Discrimination, Investment and Price Caps. Economic Policy, Vol. 20, No. 44, pp. 705-749, October 2005. Available at SSRN: https://ssrn.com/abstract=823088

Stefan Szymanski (Contact Author)

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

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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