*We thank seminar participants in Antwerp, Bristol, London, Naples and Toulouse for useful comments. This research has been supported by ESRC research grant no. R022250213. We also thank two anonymous referees and the editor for their valuable comments.
PARALLEL TRADE, INTERNATIONAL EXHAUSTION AND INTELLECTUAL PROPERTY RIGHTS: A WELFARE ANALYSIS*
Article first published online: 15 DEC 2006
The Journal of Industrial Economics
Volume 54, Issue 4, pages 499–526, December 2006
How to Cite
VALLETTI, T. M. and SZYMANSKI, S. (2006), PARALLEL TRADE, INTERNATIONAL EXHAUSTION AND INTELLECTUAL PROPERTY RIGHTS: A WELFARE ANALYSIS. The Journal of Industrial Economics, 54: 499–526. doi: 10.1111/j.1467-6451.2006.00298.x
- Issue published online: 15 DEC 2006
- Article first published online: 15 DEC 2006
This paper analyses the issue of parallel trade (arbitrage) for products protected by intellectual property rights. We discuss a basic trade-off that arises between the ex post better allocation that typically occurs under parallel trade when demand dispersion is not too high, and the ex ante reduced product quality because of lower investment. We show that the size of the welfare effects is significantly affected by the presence of a ‘generic’ product, which represents a form of competition for the monopolist. The monopolist will introduce a ‘fighting brand’ to compete with the generic, which dilutes but does not eliminate the result on the adverse effects of parallel trade on investments.