Equilibrium Parallel Import Policies and International Market Structure

Abstract

In a North-South vertically differentiated duopoly, the analysis in this paper derives equilibrium government policies towards parallel imports. By incorporating strategic interaction at the policy-setting stage and the product market, the model sheds new light on (i) the effects of parallel import policies on pricing behavior of firms and (ii) the interdependence of national parallel import policies. If demand asymmetry across countries is sufficiently large, the North forbids parallel imports to ensure its firm sells in the South thereby generating international price discrimination -- the South's most preferred market outcome -- as the equilibrium. When demand structures are relatively similar across countries, the North permits parallel imports and uniform pricing -- its most preferred market outcome -- obtains.