Wholesale Pricing under Parallel Imports

Transcription

1 Sauer Journal of Inernaional Global Economic Sudies June Wholesale Pricing under Parallel Impors Kaherine M. Sauer Universiy of Souhern Indiana bsrac This paper empirically analyzes he relaionship beeen holesale prices rade coss for parallel impor goods goods ha are raded ihou he permission of he inellecual propery righ holder. To exising general heories of PIs pricing horizonal arbirage verical price conrol are esed using daa from he European Union here parallel rade is permied. When pooling he counries suppor for he arbirage heory is found. Hoever suppor for he verical price conrol heory is evidenced hen analyzing high-priced exporers lo-priced imporers. Keyords: Parallel impors holesale pricing JEL classificaion: F L. Inroducion Wih he recen European Union expansion he poenial for arbirage is groing as ne lopriced markes are inroduced ino he inegraed rading communiy. Many of he goods being raded are proeced by some form of inellecual propery righ IPR be i paen rademark or copyrigh. In he EU an IPR holder s righ o conrol he disribuion of a good ends upon firs sale ihin he Union. This means ha arbirage is permied even if he paen rademark or copyrigh is sill valid. Imporing an auhenic produc mean for sale in one counry ino anoher counry ihou he auhorizaion from he IPR holder is ermed parallel imporaion. Parallel rade is common in he EU among bred consumer goods such as perfume elecronics clohing pharmaceuicals. 3 To objecives of he European Union are he free circulaion of goods he proecion of inellecual propery. These o ends are ofen a odds ih one anoher have resuled in a policy debae over parallel impors PIs. The communiy exhausion reamen of IPRs hence he permission of PIs encourages he free movemen of goods marke inegraion. Consumers in higher priced markes ill gain as prices converge o a loer level. In addiion his form of arbirage can generae inra-br compeiion again benefiing consumers. PI aciviies are no cosless hoever. Resources mus be spen on ransporaion re-packaging. uhorized disribuors may find PI firms free-riding on heir services e.g. markeing. This may resul in feer auhorized firms enering he marke or loer levels of pre- or pos-sales services. Original manufacurers may see heir profiabiliy decrease as heir abiliy o price discriminae is diminished. Finally consumers in lo priced markes may see heir prices rise as marke inegraion is realized.

2 Sauer Journal of Inernaional Global Economic Sudies June Undersing exacly ho parallel rade affecs pricing subseuenly elfare is imporan for accuraely addressing policy issues. There are currenly o compeing general heories of parallel impors pricing: horizonal arbirage verical price conrol. oh heories hypohesize a relaionship beeen he holesale price rade coss. While he heories have been preliminarily empirically esed his sudy seeks o provide a comprehensive analysis of all of he producs subjec o PI compeiion in he European Union. Previous sudies have used a maximum of 53 producs o years of daa; he curren sudy ill employ 55 producs en years of daa for he EU-5. In addiion case sudies of broad produc caegories e.g. pharmaceuicals are conduced. The verical price conrol heory is evidenced in every single counry in a leas one caegory of producs. Hoever his heory does no explain pricing for every produc caegory in every counry. The arbirage heory explains pricing for feer producs feer markes.. ackground Lieraure Theory The economic lieraure has advanced several heories o explain hy parallel impors arise. 5 In each parallel rade disors he marke in some ay. Disorions may be resources ased due o parallel rade aciviies inefficien verical pricing or free rider problems. Maskus 000 provides an overvie of he lieraure policy uesions empirical evidence relaed o parallel rade in general. Malueg Scharz 99 rea parallel rade as a mechanism for arbiraging aay inernaional price discriminaion. Maskus Chen 00 propose a heory here he difference beeen holesale reail prices verical price conrol heory ulimaely deermines he profiabiliy of parallel impors. Chard Mellor 989 discuss he problems ha emerge hen parallel raders free-ride on auhorized dealers local services e.g. arranies markeing coss. bsracing from any free-rider issues here are o compeing heories on parallel rade prices: horizonal arbirage verical price conrol VPC. rbirage is possible hen he holesale price varies across markes. Since local dem aribues vary so do local prices. 6 I ould be possible for a holesaler o buy a a lo price in one marke hen re-sell he good o anoher holesaler in a higher priced marke. s long as he ransporaion cos is smaller han he price difference a profi can be made on he ransacion. Since he ransacion is made a he same poin in he supply chain i.e. holesale level he arbirage is horizonal. lernaively a PI firm could buy a he holesale price in one marke hen sell he produc in a differen counry s reail marke. This firm is exploiing he reail margin difference beeen holesale reail price beeen he markes. 7 s long as he margin is larger han he ransporaion cos he aciviy is profiable for he PI firm. VPC assers ha manufacurers need o se he holesale price a a level ha ill ulimaely induce he desired reail price. Seing he holesale price opimally means here is a reail margin for PI firms o exploi. To reduce he margin PI compeiion he manufacurer could se he holesale price higher. Hoever he firm may no longer induce he desired reail price. Thus he manufacurer faces a rade off beeen opimal verical pricing deerring parallel rade compeiion. These heories have differen predicions abou ho he manufacurer ill se holesale prices in

3 Sauer Journal of Inernaional Global Economic Sudies June each marke. Trade coss have a significan role in deermining he profiabiliy of parallel rade ill ener ino he manufacurer s holesale pricing decision. Suppose ha he manufacurer of a good sells is produc in o markes. Dem in is given by = p dem in is =S bp. Le S be he populaion in marke he populaion in is normalized o. Le b > so ha marke is more elasic. The manufacurer sells o disribuors D D a holesale prices of faces a consan marginal producion cos hich is se o zero for simpliciy. The manufacurer maximizes profis by choice of he holesale price. Solving he model yields he folloing o proposiions: Proposiion : ccording o he arbirage heory he euilibrium holesale price in he imporing marke is consan as rade coss rise. In he exporing marke he holesale price is decreasing in he rade cos unil he markes are naurally segmened by a high rade cos. Proposiion : ccording o he VPC heory he euilibrium holesale price in he imporing marke is decreasing as rade coss rise. In he exporing marke he holesale price is increasing hen decreasing in rade coss. [ proof: see ppendix] Under he arbirage heory o block PI compeiion he manufacurer ill se he holesale price in he exporing marke so i differs from he price in he imporing marke by exacly he rade cos. very lo ranspor coss he holesale price in he exporing marke ill need o be se almos as high as he price in he imporing marke. s rade coss rise he holesale price in he exporing marke can be se loer. some high level of ranspor cos parallel rade is unprofiable so he markes say segmened he holesale price in he exporing marke can be se a is opimal level. In he imporing marke rade coss ill no affec he holesale price. Figure illusraes. 8 Under he VPC heory here are four ranges of coss o consider: lo inermediae high very high. When ransporaion coss are lo he volume of parallel rade coming ino he high income marke may be large. The manufacurer can decrease his volume by seing he holesale price in he imporing marke high he price in he exporing marke lo. s rade coss rise he holesale price in he imporing marke can be se loer bu he holesale price in he exporing marke mus be se higher. s ransporaion coss increase o an inermediae level more resources are ased in parallel rade. The manufacurer ill ry o decrease boh he volume of parallel rade he price compeiion in he imporing marke. his level of rade coss he holesale price in he imporing marke has fallen o he opimal level so increasing he holesale price in he exporing marke ill be he sraegy. higher acuisiion cos coupled ih high rade coss ill deer some parallel rade. The higher he rade coss he higher he holesale price in he exporing marke. When ranspor coss are high he markes are naurally almos segmened. The manufacurer

4 Sauer Journal of Inernaional Global Economic Sudies June can se he holesale price in he exporing marke o make i unprofiable o engage in arbirage. Parallel rade can be blocked compleely so no resources ill be ased in parallel rade aciviies. some very high level of rade coss he markes ill be fully segmened. The firm can achieve opimal verical pricing ihou he hrea of parallel rade. Figure illusraes. 9 Wih he relaionship beeen holesale prices ransporaion coss esablished consider ha holesale prices deermine reail prices uaniies hich in urn affec consumer surplus. Corollaries describe he heoreical relaionships beeen rade cos elfare. Corollary : ccording o he arbirage heory consumer elfare in he exporing marke is increasing in he rade cos is maximized hen he markes are segmened he holesale price is se opimally. Consumer surplus in he imporing marke is unchanged as rade coss increase. Corollary : ccording o he VPC heory consumer elfare in he exporing marke decreases unil rade coss become high hen increases unil he markes become fully segmened. Consumer surplus in he imporing marke ill rise hen fall as rade coss rise. [proof: see ppendix] Under he arbirage heory he holesale price in he imporing marke is unchanging ih rade coss so he euilibrium uaniy reail price are consan as ell. This means ha consumer surplus in he imporing marke is consan in rade coss. 0 In he exporing marke hoever he holesale price is a decreasing funcion of rade coss. This means ha as rade coss rise he euilibrium uaniy ill also rise as he holesale price falls. s uaniy rises he reail price ill fall hus consumer surplus in he exporing marke ill rise as rade coss rise ill be maximized hen he markes are segmened he holesale price is se opimally. Under he VPC heory consumer elfare in he exporing marke has a U-shape as rade coss rise. Iniially holesale prices are increasing as rade coss rise so uaniy is falling he reail price is rising. This yields falling consumer surplus. When rade coss are high he holesale price is falling he reverse is rue. Consumers in he imporing marke ill see heir surplus rise hen fall as rade coss rise. s he holesale price in his marke falls uaniy rises he reail price falls consumer surplus rises. Hoever afer he holesale price falls o is opimal level consumer surplus ill fall. This is because he uaniy sold in he imporing marke is a funcion of boh markes holesale prices. The holesale price in he exporing marke is falling bu is sill higher han opimal. This reduces uaniy increases reail price hus decreasing consumer surplus. 3. Empirical nalysis 3.. Tesable Hypohesis Since he arbirage heory VPC heory have differen predicions abou ho holesale prices are affeced by rade coss ulimaely have differen elfare implicaions i seems ise o es hem ih daa. Undersing hich heory is relevan in he real orld can aid

5 Sauer Journal of Inernaional Global Economic Sudies June policymakers in assessing he effecs of PIs rade liberalizaion on consumer elfare. Wholesale price rade cos daa are ofen available. Recall ha he arbirage heory predics ha he holesale price in he exporing lo income marke is a falling convex funcion of rade coss. This ould sugges ha a linear rade cos erm ould exer negaive influence on holesale prices ha a suared rade cos erm ould be posiive. The arbirage heory predics ha he holesale price in he imporing high income marke is independen of he rade cos. The VPC heory predics ha he holesale price in he exporing marke has an invered U-shape rising hen evenually falling. This suggess ha a linear rade cos erm ould have a posiive effec on holesale prices a suared erm ould have a negaive effec. In he imporing marke holesale prices fall as he rade cos rises suggesing he opposie signs on rade cos erms. Table summarizes he prediced effec ha increasing rade coss have on he holesale price in each marke. 3. Prior Relaed Empirical Findings Previous economiss have employed empirical ess of he VPC model. Maskus Chen 00 es heir VPC heory using US expor prices. Using 6 0-digi Harmonized Sysem producs hey model boh he expor price a he US border he holesale price in he imporing marke for he period 993. They find ha he US ariff rae operaes as prediced by he VPC heory. Gansl Maskus 003 es he VPC heory using inra-eu expor prices for 53 8-digi HS producs for eigh EU counries during he years They analyze he srucure of expor prices se by he manufacurer a he border find ha he VPC heory is consisen ih high-income counries. Evidence in favor of he arbirage heory is found hen pooling all counries ogeher. This paper ill exend he empirical esing of he compeing heories in several ays. Firs an exensive number of producs ill be included in he analysis. Previous sudies have used a maximum of 53 8-digi producs; he curren sudy ill employ 55 8-digi producs. Similar o he Gansl-Maskus ork his paper ill look specifically a he EU here parallel rade is currenly permied. Hoever fifeen counies insead of eigh ill be examined. In addiion en years orh of daa are analyzed. Finally an alernaive measure of rade cos ill be used in an aemp o resolve a knon endogeniey issue. Resuls are consisen ih prior findings. In pooled regressions he arbirage heory appears o be he relevan heory for explaining pricing decisions on goods subjec o PI compeiion. Hoever hen analyzing high-price exporers lo-price imporers VPC appears o be he relevan heory. 3.3 Empirical Specificaion To es he heories daa from a single manufacurer seing holesale prices along ih rade cos daa should be used. Readily available are daa on expor prices rade coss a a deailed produc level. Expor prices ill be used in lieu of holesale prices; inernaional prices are hough o accuraely capure holesale prices because a subsanial amoun of rade occurs hrough disribuors. Hence similarly o Gansl Maskus 003 he folloing

6 Sauer Journal of Inernaional Global Economic Sudies June regression euaion is esimaed Y β error. m eprice cmp = a TCcmp β TC cmp β3 Yc cmp The dependen variable is defined o be he expor price of produc p a he border of source counry c going o desinaion counry m in year. Since he dependen variable is he expor price a he border of he source marke i ill become afer rade coss he holesale price in he desinaion marke. Independen variables include he rade cos TC a conrol for relaive marke size Y m /Y c. ddiionally counry produc period dummy variables ill be included. Wih regard o heoreical sign predicions recall from Table ha in an expor marke a posiive sign on he linear rade cos erm a negaive suared erm indicae suppor for VPC. The arbirage heory predics he opposie relaionship beeen rade coss holesale prices in expor markes. Theory does no have a clear predicion on he sign of he relaive marke size variable. On one h if he exporing marke is large i is likely o have high prices resuls in a lo raio. This ould indicae a negaive coefficien. On he oher h if he exporing marke is large very compeiive is prices may be lo he coefficien ould have a posiive sign. 3. Daa Parallel rade is no permied in every counry. The European Union does permi parallel rade beeen member saes so here is an opporuniy o es he heories using daa from his region. Hoever acual daa on parallel rade are no colleced by cusoms. While a firs blush his ould seem o be a large limiaion he analysis is sill jusifiable. The mere hrea of PI compeiion is ofen enough o induce he original manufacurer of a good o modify pricing decisions. The firm may deer PI compeiion by pricing in such a ay ha no PI firms acually ener he marke. In his case even if PI daa ere colleced he value uaniies of PI rade ould be zero. Thus i is appropriae o conduc he analysis using goods ha are likely subjec o PI compeiion. In addiion previous economic analysis on parallel rade is also execued using goods ha ere likely o face PI compeiion. 999 sudy by The Naional Economic Research ssociaes in he EU indicaes ha he folloing caegories of producs are likely subjec o parallel rade: cocoa sugar confecionary ice cream alcohol sof drinks mineral aers clohing fooear CDs videodisks soap perfume deergen oileries consumer appliances consumer elecronics. 3 In addiion pharmaceuicals are considered since parallel rade is knon o be a facor in ha indusry. These caegories encompass digi HS producs in Eurosa s online rade daabase Comex. While eigh digis is he mos disaggregaed level of daa available from Comex keep in mind i is sill an aggregaion. For example 8-digi code indicaes shampoos. rip don he hair-care aisle a your local reailer ill assure you ha here are a number of differen varieies of shampoo producs. s such here is sill some heerogeneiy a he produc level. The proper daa o analyze ould be idenical producs hoever 8-digis is he mos disaggregaed daa available a his ime.

7 Sauer Journal of Inernaional Global Economic Sudies June Daa on he 566 producs are exraced for he fifeen EU counries prior o enlargemen: usria elgium Denmark Finl France Germany Greece Irel Ialy Luxembourg he Neherls Porugal Spain Seden he Unied Kingdom. Daa are annual over he period Observaions for each source desinaion counry include a produc s uaniy in 00kg value in euros for expors impors. 6 Expor price The expor price is defined o be he expor uni value. The uni value is calculaed by dividing he expor value by expor uaniy measured in uaniy per 00kg. Trade Cos In heir comprehensive aricle on rade coss nderson Wincoop 00 noe ha using direc measures of rade cos e.g. using ocean shipping raes air freighs gleaned from rade journals is bes bu a idely used ofen readily available opion is o use naional cusoms daa on he value of impors ih ihou charges for insurance freigh. Commonly used in he lieraure rade cos is calculaed as he raio of impor uni value o expor uni value. This capures he acual produc- marke-specific rade cos per uni is also knon as he CIF/FO measure of ransporaion cos. 7 Hoever since in his case he dependen variable is also he expor uni value using he CIF/FO measure of rade cos ould resul in an endogeneiy problem. presen here is no anoher readily available measure of rade cos ha is boh produc marke specific. To avoid he endogeneiy issue an average of he expor uni values ill be used. Since he dependen variable is he expor uni value for a specific produc imporer from exporer c he expor uni value used o calculae he rade cos ill be he average expor uni value for he same produc imporer from all exporers excluding exporer c. Conrol Variables The marke size conrol variable is defined as he raio of he imporing counry s populaion o he exporing counry s populaion as is suggesed by heory. EU counry populaion daa is available from Eurosa. Dummy variables for counry produc period are also included. fer maching produc-period-desinaion observaions ih heir corresponding produc-periodsource observaions eliminaing ouliers he daase conains records of machedparner observaions 53 8-digi producs. 8 Table illusraes he average holesale price of goods going o each counry. The price level is calculaed as he average expor uni value o a specific counry relaive o he mean expor uni value in all fifeen counries. Theory suggess ha counries ih high prices are likely desinaion markes. 9 The UK France Ialy Luxembourg are he counries ih he highes prices. Counries such as Greece Spain Porugal are likely source markes. 3.5 Regression Resuls Ordinary Leas Suares regressions are esimaed separaely for each counry as an exporer using all oher counries as desinaion markes. s here are over 500 producs heir means

8 Sauer Journal of Inernaional Global Economic Sudies June vary grealy heeroskedasiciy is a problem. Robus sard errors are used are clusered a he -digi produc level. Table 3 conains he resuls. 0 In he pooled regression he linear rade cos coefficien is negaive he suared erm is posiive boh are significan. This indicaes suppor for he arbirage heory. The same resul is found in a majoriy of he individual counry regressions. The excepions are Denmark Porugal hich have a negaive linear rade cos erm bu insignifican suared erms usria Finl The Neherls Spain. Recall ha he regressions included a conrol for populaion dummy variables for produc period desinaion marke. The populaion raio coefficien is significan posiive in he pooled regression. This indicaes ha larger expor markes may be more compeiive have loer prices. In he individual counry regression he populaion coefficien as only significan for usria Porugal. In Porugal hoever he sign as negaive. The majoriy of he produc dummy variables are significan indicaing idiosyncraic pricing a he 8-digi produc level. Wih regard o desinaion marke dummy variables in he vas majoriy of expor markes he coefficiens ere insignifican. For usria Porugal hoever he desinaion marke dummy coefficiens ere significan. Period dummy variables varied in significance. Since parallel rade occurs beeen markes ih price differenials one ould expec o see an even more pronounced effec he greaer he dispariy in price. s such he sample is narroed o include only he high-priced counries France UK Ialy Luxembourg as source markes he lo-priced counries Spain Porugal Greece as desinaion markes. Table presens he resuls. In he pooled regression ih all four high-priced counries exporing o he lo-priced markes he coefficiens are significan signs are consisen ih he VPC heory. Recall ha he coefficiens from he pooled regression for all exporers o all imporers suppored he arbirage heory. These resuls indicae ha hen parallel rade is likely i.e. hen here is a greaer price differenial hen he manufacurer ill exer verical price conrol. In he individual high-priced counry regressions VPC suppor is found in he Unied Kingdom Ialy eakly in Luxembourg. The coefficiens for France are no significan indicaing ha he VPC heory is no relevan for ha marke.. Discussion s in previous ork esing heories of parallel rade holesale pricing suppor is found for he VPC heory in high priced markes. The VPC heory has clear predicions regarding he relaionship beeen rade coss elfare. Therefore markes here VPC is evidenced need o assess o he curren level of rade coss before considering rade liberalizaion. When rade coss are already lo loering rade coss ill leave consumer surplus unchanged in he imporing marke ill decrease consumer elfare in he exporing marke. Thus a reducion in rade coss is no a good idea from a global consumer elfare poin of vie. When rade coss are a an inermediae level reducing hem ill increase consumer elfare in boh markes. high levels of rade cos bu no so high ha he markes are segmened consumers in he exporing marke ill gain consumers in he imporing marke ill lose as he cos falls. The effec on global consumer elfare may be posiive or negaive.

9 Sauer Journal of Inernaional Global Economic Sudies June The en counries ha joined he European Union during he 00 enlargemen have relaively lo GPD per capia. Table 5 conains 00 GDP per capia for all of he counries in he European Union sored from high o lo. Recall ha Spain Porugal Greece ere he loincome parallel exporers before he enlargemen. ll of he recen accession counries have similar or loer income per capia. These markes ill be likely parallel exporers. If he VPC heory is relevan for hese markes hen consumers in hese expor markes ill see a reducion in elfare as hey join he Union firms engage in parallel rade. Consumers in he higher income imporing markes should see an increase in heir elfare. 5. Conclusion In his paper I empirically es o opposing heories of pricing parallel rade. Suppor for he VPC heory is evidenced for he high priced exporers. The VPC heory has some clear predicions on consumer elfare hen parallel rade is alloed. ecause he VPC heory explains firms pricing decisions in he face of rade coss for a variey of producs in several markes of he European Union consumers in lo income counries ha join he EU may see heir elfare diminished. Policymakers in naions considering legalizing PIs ill an o consider he ype of producs affeced by PI compeiion as ell as curren rade coss before aking any acion. Endnoes * uhor s address: [email protected]. Special hanks o Keih Maskus Maias Gansl Sco Savage nna Rubinchik for numerous helpful commens conversaions. Warm graiude is exended o Elija Har for daa rangling assisance.. This is knon as regional exhausion of an IPR. Inernaional exhausion of IPRs sipulaes ha disribuion righs end upon firs sale anyhere. Naional exhausion assers ha righs end upon firs sale in each counry.. Parallel impors are legiimae goods no knock-offs or counerfeis. 3. See NER See Gansl Maskus 003 for a horough revie of he policy debae EU case la. 5. Danzon 997 noes ha ih regard o pharmaceuical producs specifically naion price regulaion also plays a role in explaining parallel impors. 6. Prices may also vary due o ualiy or exchange rae flucuaions.

10 Sauer Journal of Inernaional Global Economic Sudies June Maskus Chen noe ha i is possible for PIs o flo from counries ih high reail prices o hose ih loer reail prices. 8. Figure dran according o he heoreical model. See he ppendix for derivaion. 9. Figure dran according o he heoreical model. See he ppendix for derivaion. 0. In his model he arbirage akes place a he holesale level. When arbirage occurs a he reail level hen consumer surplus in he imporing marke increases as arbirage compeiion loers he price.. See he US ureau of Economic nalysis Survey of Curren usiness February 997. Maskus Chen 00 also use his raionale for using inernaional price daa o capure holesale prices.. The specificaion of Y m /Y c is akin o he raio of desinaion marke populaion o source marke populaion from he heoreical model. 3. The NER sudy used marke research o provide a basis for esimaing ho ineresed paries migh respond o a change in he rademark exhausion regime. I focused on en secors hich ere mainly chosen on he basis of he imporance of rademarks in he secor. The secors ere mainly consumer goods because consumers are likely o use rademarks as an indicaion of ualiy. The analysis as resriced o en secors o keep he scope of he sudy ihin reasonable limis. Four caegories of ineresed paries ere inervieed: rademark oners impor/expor associaions consumer organizaions SME organizaions. Posiion papers oher submissions by ineresed paries ere also examined.. The daabase can be accessed a hp://fd.comex.eurosa.cec.eu.in/xeb/. 5. Observaions for Luxembourg begin in Supplemenal uaniy daa is also available he enire analysis is repeaed using his measure of uaniy for robusness. 7. s an alernaive he rade cos is proxied using he disance in kilomeers beeen counry capials. Regressions are run using rade cos disance separaely as ell as a specificaion including boh measures. These alernaive specificaions did yield significan resuls. 8. fer compuing boh impor average expor uni values observaions for hich he impor uni value as less han he average expor uni value ere dropped. 9. Exreme values of elasiciy relaive marke size ould be needed for lo priced markes o be desinaion markes. 0. Produc counry dummy resuls for each regression are oo numerous o presen succincly. The signs significance of he dummy variables are discussed laer in he paper.

11 Sauer Journal of Inernaional Global Economic Sudies June In he usria regression only he coefficiens for Porugal Seden ere insignifican. In Porugal only elgium as insignifican.. Since hey are so numerous he dummy variables for produc period source marke are omied from he able. References nderson J. E. E. van Wincoop. 00. Trade Coss NER Working Paper #080. Chard J. S. C. J. Mellor Inellecual Propery Righs Parallel Impors World Economy Gansl M. K. E. Maskus Verical Resrains Disribuion he Price Impac of Parallel Impors: Implicaions for he European Union Seden in High Prices in Seden Resul of Poor Compeiion? Sedish Compeiion uhoriy Repor Gansl M. K. E. Maskus Verical Disribuion Parallel Trade Price Divergence in Inegraed Markes European Economic Revie Malueg D. M. Scharz. 99. Parallel Impors Dem Dispersion Inernaional Price Discriminaion Journal of Inernaional Economics Maskus K. E Parallel Impors The World Economy: Global Trade Policy Maskus K. E. Y. Chen. 00. Parallel Impors in a Model of Verical Disribuion: Theory Evidence Policy Pacific Economic Revie Maskus K. E. Y. Chen. 00. Verical Price Conrol Parallel Impors: Theory Evidence Revie of Inernaional Economics Naional Economic Research ssociaes The Economic Conseuences of he Choice of Regime in he rea of Trademarks. London: Naional Economic Research ssociaes.

12 Sauer Journal of Inernaional Global Economic Sudies June Figure : Wholesale Prices rbirage Theory Impor Marke Wholesale Price Expor Marke Trade Cos Figure : Wholesale Prices Verical Price Conrol Theory Wholesale Price Impor Marke Expor Marke Trade Cos

13 Sauer Journal of Inernaional Global Economic Sudies June Table. Hypohesized Relaionship of Trade Cos o Wholesale Prices Trade Cos Trade Cos Suared rbirage Theory price in expor marke - price in impor marke no effec no effec Verical Price Conrol Theory price in expor marke - price in impor marke - Table. verage Expor Price o a Specific Counry Relaive o he Mean Expor Price o he Oher EU Counries usria elgium Denmark Finl France Germany Greece Irel Ialy Luxembou rg N N N N Neherl s Porugal Spain Seden U.K

14 Sauer Journal of Inernaional Global Economic Sudies June Table 3. The Effec of Trade Cos on Wholesale Prices Pooled usria elgium Denmark Finl France Germany Greece Irel Ialy Luxem. Neher. Porugal Spain Seden UK Trade Cos Trade Cos Suared Populaion Raio Coefficien Sd. Error Coefficien Sd. Error Coefficien Sd. Error n R-Sr -63. ** ** ** ** ** ** ** ** ** ** ** ** ** ** ** ** ** ** ** ** ** ** ** ** ** ** Significan a he 5% level. Table. High Price Counries as Exporers Trade Cos Trade Cos Suared Coefficien Sd. Error Coefficien Sd. Error N R-sr Pooled Regression 9.59 ** ** France Unied Kingdom.953 ** ** Ialy.89 ** ** Luxembourg ** ** Significan a he 5% level.

15 Sauer Journal of Inernaional Global Economic Sudies June Table 5. GDP Per Capia 00 GDP Counry Per Capia Luxembourg 5688 Irel 3688 Denmark Seden 30 Neherls usria 90 UK 878 Finl 8685 elgium 770 France 738 Germany 686 Ialy 33 Spain 977 Cyprus 707 Greece 5 Porugal 370 Slovenia 3097 Mala 0695 Czech Republic 899 Hungary 808 Esonia 6693 Slovakia 656 Pol 533 Lihuania 58 Lavia 805

16 Sauer Journal of Inernaional Global Economic Sudies June ppendix rbirage Model Suppose ha he manufacurer M of a good sells is produc in o markes. Dem in is given by = p dem in is =S bp. Le S be he populaion in marke he populaion in is normalized o. Le b > so ha marke is more elasic. M sells o disribuors D D a holesale prices of faces a consan marginal producion cos hich is se o zero for simpliciy. No Parallel Trade In a orld ih no parallel rade each disribuor sells only in heir inended marke maximizes profis by choice of uaniy: max Π = S max Π =. bs Solving he firs order condiions yields = 3 S b =. M ses he holesale prices o maximize profis max Π =. 5 M Subsiuing 3 ino 5 aking firs order condiions solving gives he profi maximizing holesale prices * = * =. 6 b Since > if parallel rade ere permied rade coss ere less han - hen D could make a profi by buying in re-selling o D. Euilibrium uaniies are * = S * = 7 so euilibrium reail prices are

17 Sauer Journal of Inernaional Global Economic Sudies June p * = 3 * =. 8 b Consumer surplus in each marke is CS = 3 S CS =. 9 3b Parallel Trade Permied Suppose no ha parallel rade is permied. Le he marginal cos of ransporing a good from o be eual o. s long as he ransporaion cos is no oo large i ill be profiable o engage in parallel rade. The disribuor in is indifferen beeen purchasing from he original manufacurer or from D. ssume ha D ill sell a a holesale price slighly epsilon small belo o ensure ha all of is volume is sold. This means ha he manufacurer ill no be making any sales in marke. Since parallel rade is only profiable for D hen > he manufacurer could compleely block parallel rade by seing he holesale price in marke so i differs by exacly from he holesale price in marke. When rade coss are zero M ill have o se he holesale price in marke exacly eual o he holesale price in marke. There comes a poin hen he ransporaion cos is high enough ha parallel rade is deerred naurally he manufacurer can price opimally in he exporing marke as in 6. This marke segmening rade cos is 0 b =. 0 b To block parallel rade hile seing opimally he holesale price in marke is se according o * =. Euilibrium uaniy reail price in he exporing marke are S b b * = p * =. 3 b Euilibrium uaniy reail price in he imporing marke are he same as in 7 8.

18 Sauer Journal of Inernaional Global Economic Sudies June Turning o he elfare effecs since he holesale price in he imporing marke is unchanging ih rade coss so are he euilibrium uaniy price. This means ha consumer surplus in he imporing marke is consan in rade coss as ell. In his model he arbirage akes place a he holesale level. When arbirage occurs a he reail level hen consumer surplus in he imporing marke increases as arbirage compeiion loers he price. In he exporing marke hoever he holesale price is a decreasing funcion of rade coss. More explicily consumer surplus in he exporing marke is S b b CS = b differeniaing yields CS = S b b > 0 5 so consumer elfare in he exporing marke is increasing in he rade cos is maximized hen he markes are segmened he holesale price is se opimally. Verical Price Conrol Model This is he formal model pu forh by Maskus Chen 00. Suppose again ha he manufacurer M of a good sells is produc in o markes. Dem in is given by = p dem in is = S bp. Le S be he populaion in marke he populaion in is normalized o. Le b > so ha marke is more elasic. M faces a consan marginal producion cos ha is se o zero for simpliciy. M sells is produc hrough disribuors D D. M ill offer a conrac o each of he disribuors in he form of i F i here is he holesale price F is a franchise fee here i =. No Parallel Trade Taking he conracs i F i as given The disribuors profi funcions from sales are Π = 6 S Sb Π =. 7 Taking firs order condiions solving for he uaniies yields = 8 S b =. 9

19 Sauer Journal of Inernaional Global Economic Sudies June Thus reail prices are p = 0 b p = b disribuors profis from sales are eual o Π = S b Π =. 3 b Turning no o he conrac he manufacurer can capure all of he disribuors profis by seing he franchise fees eual o profis F = Π = S b F = Π =. b 5 The holesale prices ill be chosen o maximize he manufacurer s profis Π M = S b b S b. 6 b Euaion 8 is also global indusry profis. Euilibrium holesale prices are * = 0 * = 0. 7 Since he marginal cos of producion is normalized o zero i makes sense ha he holesale prices are also zero. Euilibrium uaniies are * = S * = 8 making reail prices p * = p * =. 9 b

20 Sauer Journal of Inernaional Global Economic Sudies June Consumer elfare in each marke is 8 = CS b S CS 8 =. 30 Parallel Trade Permied Suppose no ha he manufacurer has no legal auhoriy o preven D from selling in. Le he marginal cos of ransporing a good from o be eual o. Le < / so i is no oo cosly o engage in parallel rade aciviies. If D does choose o sell in hen le D D compee in a Courno fashion. Consider euilibrium in marke. his poin ake i F i as given. The disribuors profi funcions from sales in marke are = Π 3. 3 = Π The superscrip represens he marke in his case marke he subscrip represens he disribuor. The firs order condiions are 0 = = as long as < /. Quaniies as a funcion of holesale prices are 3 = 35 3 = 36 The reail price in marke is herefore 3 p = 37 Disribuors profis in marke are 9 = Π 38

21 Sauer Journal of Inernaional Global Economic Sudies June = Π. 39 No consider euilibrium in marke. The disribuor in his marke ill maximize profis by choice of reail price. s before i F i is aken as given a his poin. The profi euaion is p bp S = Π 0 he euilibrium price uaniy are b b p = b S =. This disribuor s profis in marke are b b S = Π. 3 Turn no o he choice of conrac. When seing he franchise fee he manufacurer can capure all of he disribuors profis. Thus he franchise fees are F Π =. 5 F Π = Π The manufacurer ill hen choose he holesale prices o maximize profis M F F = Π. 6 The simplified firs order condiions are 0 5 = = Sb so he euilibrium holesale prices are Sb 5 * = 9

22 Sauer Journal of Inernaional Global Economic Sudies June * =. 50 Sb Noice ha he opimal holesale price in marke is decreasing in he rade cos. There mus be some rade cos a hich his holesale price reaches is opimal level of zero. Seing 5 eual o zero e find ha his hreshold rade cos is eual o Sb =. 5 5Sb Therefore 5 53 are he euilibrium holesale prices over he range <. When he rade cos passes he hreshold hen he opimal holesale prices are * = 0 5 * =. 53 9Sb Noice ha he holesale price in marke is sill increasing in he rade cos. This ill be he case unil = /. This second hreshold occurs hen he rade cos is eual o 3Sb =. 5 3Sb So for > he opimal holesale prices are * = 0 55 * =. 56 fer he second hreshold is passed he holesale price in marke is decreasing in he rade cos. While no presened here i is sraighforard o solve for euilibrium uaniies reail prices. Welfare in each of he markes depends on he rade cos. Consumer surplus in he imporing marke is CS 8 [ 3Sb ] = 9Sb 8 if < if < < if > 57

23 Sauer Journal of Inernaional Global Economic Sudies June in he exporing marke is CS S 8Sb [ 9Sb b ] = 8b 9Sb S[ b ] 3b if < if < <. if > 58 Differeniaing each ih respec o rade coss yields CS CS > 0 if < [ 3Sb ] 3Sb if < < = < 0 9Sb 0 if > S if < < 0 Sb [ 9Sb b ] if = < 0 < <. 9Sb S[ b ] > 0 if > So in he imporing marke elfare is increasing hen decreasing in he rade coss. s long as 0 < < he consumers in he imporing marke have higher elfare hen parallel rade is permied. When rade coss exceed consumer surplus is he same as hen parallel impors are resriced. In he exporing marke elfare is decreasing unil he second hreshold of rade coss is reached hen increases unil rade coss segmen he marke. Consumers in his marke have loer elfare over he enire range of profiable rade coss 0 < < / hen parallel rade is permied.