Imposing trade restrictions on parallel imports has the surprising effect of motivating a firm to export, according to a new study by economists Santanu Roy of SMU’s Dedman College and Kamal Saggi of Vanderbilt University.
Using game theory analysis, the economists found that diverse parallel importing policies among countries today make it possible to analyze for the first time how competition between firms and allowing or banning parallel imports can influence competition in foreign and domestic markets.
“Our research is the first to look at the consequence of strategic policy setting by governments in the context of competition in domestic and foreign markets,” said Roy, professor and director of graduate studies in the Department of Economics.
Most surprising among the findings, he said, is that imposing trade restrictions on parallel imports can actually motivate a firm to export – which can be the case when the market to which the firm is exporting is smaller than its own.
“So even though you are formally prohibiting the import of a product, you are actually promoting trade,” Roy said. “And that’s a new way of looking at this.”
Parallel importing occurs when a manufacturer exports its trademarked or patented products to a foreign market where demand, policies or price pressures require the goods be sold at a lower price. A third-party buyer purchases the low-priced goods and imports them back to the manufacturer’s home country, undercutting domestic prices.
The controversial practice has spawned gray market retail, where consumers buy high-value, brand-named goods at cut prices, such as electronics, video games, alcohol, books and pharmaceuticals.
Some advocates of free trade decry parallel importing, saying it infringes on manufacturers’ intellectual property rights accorded by copyright, patent and trademark laws. That, in turn, can discourage investment in new technology and products.
As a result, some countries allow parallel importing; others ban it. For example, parallel importing is allowed among the member countries of the European Union. It’s not permitted by the United States, although exceptions exist for many different products. Generally speaking, developed nations restrict parallel importing, while developing nations allow it.
The study by Roy and Saggi found there is no one-size-fits-all solution – neither a global ban nor a blanket endorsement. In fact, the authors found that policy diversity is working well because it takes into account important variables such as similarity or dissimilarity of markets, as well as competing products and government regulations.
“The only area where there may be need for intervention is where there may be major asymmetries between countries – where one country is very large and the other is very small,” Roy said.
Roy and Saggi report their findings in two articles: “Equilibrium Parallel Import Policies and International Market Structure,” a scenario in which there are quality differences in the products across countries, forthcoming in the Journal of International Economics; and “Strategic Competition and Optimal Parallel Import Policy,” a scenario in which there is asymmetrical protection of intellectual property, forthcoming in the Canadian Journal of Economics. The two economists were members of a development research group at the World Bank that researched parallel importing.
Written by Margaret Allen