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Sunandan Ghosh
''Parallel Imports, Product Quality and Endogenous Trading Bloc Formation''
( 2018, Vol. 38 No.3 )
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-à-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.
Keywords: Parallel Imports, Endogenous Product Quality, Trading Bloc, Intra-country Taste Diversity
JEL: F1 - Trade: General
L1 - Market Structure, Firm Strategy, and Market Performance: General
Manuscript Received : Oct 18 2017 Manuscript Accepted : Jul 18 2018

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