Vertical Distribution, Parallel Trade, and Price Divergence in Integrated Markets

30 Pages Posted: 16 Mar 2007

See all articles by Mattias Ganslandt

Mattias Ganslandt

Centre for European Law and Economics; Research Institute of Industrial Economics; University of Colorado at Boulder - Department of Economics

Keith E. Maskus

University of Colorado at Boulder - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: April 15, 2005

Abstract

We develop a model of vertical pricing in which an original manufacturer sets wholesale prices in two markets that are integrated at the distributor level by parallel imports (PI). The manufacturing firm needs to set these two prices to balance three competing interests: restricting competition in the PI-recipient market, avoiding resource wastes due to actual trade, and reducing the double-markup problem in the PI-source ation. These trade-offs imply the counterintuitive result that both wholesale and retail prices could diverge as a result of declining trading costs, even as the volume of PI increases. Thus, in some circumstances it may be misleading to think of PI as an unambiguous force for price integration.

Keywords: Vertical Restraints, Parallel Imports, Market Integration

JEL Classification: F12, F15

Suggested Citation

Ganslandt, Mattias and Maskus, Keith E., Vertical Distribution, Parallel Trade, and Price Divergence in Integrated Markets (April 15, 2005). Available at SSRN: https://ssrn.com/abstract=970838 or http://dx.doi.org/10.2139/ssrn.970838

Mattias Ganslandt (Contact Author)

Centre for European Law and Economics ( email )

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Research Institute of Industrial Economics ( email )

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HOME PAGE: http://www.industrialeconomics.se/mg

University of Colorado at Boulder - Department of Economics ( email )

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HOME PAGE: http://www.mattiasganslandt.com

Keith E. Maskus

University of Colorado at Boulder - Department of Economics ( email )

Campus Box 256
Boulder, CO 80309
United States
303-492-7588 (Phone)
303-492-8960 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

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Munich, DE-81679
Germany

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