Product Introduction with Parallel Importation

Abstract

The aim of this paper is to investigate the manufacturer’s product introduction decision when entering a foreign market by considering parallel importation. This paper considers a situation where a manufacturer already sells an original product directly in the domestic market and decides to introduce an original product, a new product, or both through a retailer in a foreign market, and a parallel importer may divert the original product across markets due to price gap (we call it parallel importation). This paper shows that when consumers perceive gray products as perfect substitutes for authorized products, the manufacturer switches from introducing two products to introducing a new product and still maintains the quality of the new product in the presence of parallel importation. Furthermore, in response to parallel importation, the manufacturer not only narrows the price gap for original products between two markets but also reduces the wholesale price of new products in the foreign market. In addition, parallel importation always hurts the retailer but may benefit the manufacturer. Counterintuitively, parallel importation always improves social welfare in the domestic market but may damage social welfare in the foreign market.