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  An Analysis of the Welfare Effects of Parallel Trade Freedom

Mueller-Langer, F. (2008). An Analysis of the Welfare Effects of Parallel Trade Freedom. German Working Papers in Law and Economics, 2008,9.

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Item Permalink: http://hdl.handle.net/11858/00-001M-0000-0012-61A7-2 Version Permalink: http://hdl.handle.net/11858/00-001M-0000-0012-61AA-B
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 Creators:
Mueller-Langer, Frank1, Author              
Affiliations:
1MPI for Intellectual Property and Competition Law, Max Planck Society, ou_830549              

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Free keywords: parallel trade, pharmaceuticals, R&D incentives, welfare effects, economic analysis of intellectual property rights
 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.

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Language(s): eng - English
 Dates: 2008
 Publication Status: Published online
 Pages: 39
 Publishing info: Berkeley, California : Berkeley Electronic Press
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Title: German Working Papers in Law and Economics
Source Genre: Series
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Pages: - Volume / Issue: 2008,9 Sequence Number: - Start / End Page: - Identifier: -