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

28 Pages Posted: 15 Dec 2006

See all articles by Tommaso M. Valletti

Tommaso M. Valletti

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

Stefan Szymanski

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

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Abstract

This paper analyses the issue of parallel trade (arbitrage) for products protected by intellectual property rights. We discuss a basic trade-off that arises between the ex post better allocation that typically occurs under parallel trade when demand dispersion is not too high, and the ex ante reduced product quality because of lower investment. We 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.

Suggested Citation

Valletti, Tommaso M. and Szymanski, Stefan, Parallel Trade, International Exhaustion and Intellectual Property Rights: A Welfare Analysis. Journal of Industrial Economics, Vol. 54, No. 4, pp. 499-526, December 2006. Available at SSRN: https://ssrn.com/abstract=951835 or http://dx.doi.org/10.1111/j.1467-6451.2006.00298.x

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

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)

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