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Parallel Imports, Product Quality and Endogenous Trading Bloc Formation

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  • Sunandan Ghosh

    (Centre For Development Studies)

Abstract

This paper analyzes the role of parallel imports (PIs) in determining both optimal product quality and optimal trade policy. We consider a three country world economy, where poor (P) and middle-income (M) countries import a vertically differentiated good produced and exported by a patent holder monopolist in the rich country (R), when PIs are allowed. In presence of both inter and intra-country taste diversity, PIs lower the level of innovation irrespective of tariff regimes vis-Ã -vis when PIs are not allowed. The optimal tariff levels imposed by the importing countries are lower under PIs irrespective of the tariff regimes. Formation of a Free Trade Area (FTA) by R is feasible with side-payments to its FTA partner given intra-country taste diversity. A customs union (CU) among the importing countries turns out to be globally Pareto superior given both inter and intra-country taste diversity. The level of innovation is highest under such CU as compared to all other tariff regimes.

Suggested Citation

  • Sunandan Ghosh, 2018. "Parallel Imports, Product Quality and Endogenous Trading Bloc Formation," Economics Bulletin, AccessEcon, vol. 38(3), pages 1415-1427.
    • Handle: RePEc:ebl:ecbull:eb-17-00834
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    References listed on IDEAS

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    More about this item

    Keywords

    Parallel Imports; Endogenous Product Quality; Trading Bloc; Intra-country Taste Diversity;
    All these keywords.

    JEL classification:

    • F1 - International Economics - - Trade
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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