Parallel imports and price controls

Authors


  • The authors are grateful to the U.S. National Science Foundation (grants SES 0211748 and SES 0451712), the Hong Kong Research Grants Council (project no. CityU 1476/05H), the Department of Economics and Finance at City University of Hong Kong, School of Economics at Singapore Management University, and the International Economics Section at Princeton University for financial support. We thank Pol Antràs, Rick Bond, Joan Costa-Font, Joseph Harrington, Jota Ishikawa, Stefan Szymanski, Tommaso Valletti, and two anonymous referees for comments on an earlier draft. Any opinions, findings, and conclusions or recommendations expressed in this article are those of the authors and do not necessarily reflect the views of the National Science Foundation or any other organization.

Abstract

Price controls create opportunities for international arbitrage. Many have argued that such arbitrage, if tolerated, will undermine intellectual property rights and dull the incentives for investment in research-intensive industries such as pharmaceuticals. We challenge this orthodox view and show, to the contrary, that the pace of innovation often is faster in a world with international exhaustion of intellectual property rights than in one with national exhaustion. The key to our conclusion is to recognize that governments will make different choices of price controls when parallel imports are allowed by their trade partners than they will when they are not.

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