Parallel imports in large developing countries

Abstract

We formulate a two-stage game to examine the parallel import (PI) policies for large developing countries. Two countries, a developed (N) and a developing (S), make their PI policies in the first stage. A high-quality variety is produced in N by a monopoly firm, and a low-quality variety is produced in S by a lot of firms under perfect competition. The monopoly firm chooses the optimal pricing strategy in the second stage. We clarify how market outcomes and PI policies depend on the quality difference, the income differential, country sizes, and the weights of consumer surplus and firm profits in measuring the national welfare. Our results provide a theoretical base for developing countries to make their PI policies according to their market sizes. Discriminatory pricing is obtained when governments care about consumer surplus, while uniform pricing is obtained when governments care about firm profit.