Parallel Trade and its Ambiguous Effects on Global Welfare

Authors

  • Frank Mueller-Langer

    Corresponding author
    1. Max Planck Institute for Intellectual Property and Competition Law, Marstallplatz 1, 80539 Munich, Germany
      Mueller-Langer: Max Planck Institute for Intellectual Property and Competition Law, Marstallplatz 1, 80539 Munich, Germany. Tel: +49-89-24246453; Fax: +49-89-24246503; E-mail: frank.mueller-langer@ip.mpg.de.
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    • The author wishes to thank an anonymous referee, Monika Schnitzer, Jürgen Eichberger, Klaus Schmidt, Hans-Bernd Schäfer, Eberhard Feess, and colleagues and seminar participants in Hamburg, Heidelberg, Munich, Copenhagen, and Toulouse for their valuable comments.


Mueller-Langer: Max Planck Institute for Intellectual Property and Competition Law, Marstallplatz 1, 80539 Munich, Germany. Tel: +49-89-24246453; Fax: +49-89-24246503; E-mail: frank.mueller-langer@ip.mpg.de.

Abstract

The regulation of parallel trade is a fiercely debated issue in the global trading system. This paper investigates the welfare effects of parallel trade freedom for different levels of trade costs and market size. It is found that parallel trade freedom has a positive effect on global welfare if countries are sufficiently heterogeneous in terms of market size and trade costs are sufficiently low. Contrary to intuition, this result even holds in a situation where parallel trade freedom implies the closure of the smaller market. If, however, countries are virtually homogenous in terms of market size, parallel trade freedom may be detrimental to global welfare for specific levels of trade costs.

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