An elementary proposition concerning parallel imports

Journal of International Economics 56 (2002) 233–245www.elsevier.com/ locate /econbase

qAn elementary proposition concerning parallel imports

*Martin RichardsonDepartment of Economics, University of Otago, P.O. Box 56, Dunedin, New Zealand

Received 12 February 1999; received in revised form 14 December 2000; accepted 26 December 2000

Abstract

This paper demonstrates that, when countries individually choose whether or not toprohibit parallel imports, a global Nash equilibrium involves the permitting of parallelimporting into all relevant foreign markets i.e. global uniform pricing. This result issensitive in a straightforward way to the tariff-setting powers of countries and to thespecification of a government’s objective function (i.e. political economy considerations).We also show that when countries can prevent ‘parallel exports’ then any Nash equilibriuminvolves global price discrimination. 2002 Elsevier Science B.V. All rights reserved.

Keywords: Grey markets; Parallel imports

JEL classification: F13; F15

1. Introduction

The phenomenon of parallel imports (or grey markets) — ‘the importation ofgenuine . . . goods for resale by an agent other than the local authorised

1distributor’ — is one that has gained increasing prominence in recent years. Anumber of countries — including Australia, New Zealand and Singapore — haverecently liberalised restrictions on parallel importing and the European Union is

qOr, A black and white result on grey markets.*Tel.: 164-3-479-8654; fax: 164-3-479-8174.E-mail address: [email protected] (M. Richardson).1NZIER (1998) at http: / /www.moc.govt.nz / /cae /parallel /parallel-01.html[P227 9191.

]

0022-1996/02/$ – see front matter 2002 Elsevier Science B.V. All rights reserved.PI I : S0022-1996( 01 )00110-6

234 M. Richardson / Journal of International Economics 56 (2002) 233 –245

2very active in preventing restrictions on internal parallel imports. Scherer (1994)notes that the first major competition policy enforcement in the EC concerned anattempted dealership territoriality within the EC and Malueg and Schwartz (1994,MS henceforth) suggest that, ‘[g]enerally, policies worldwide firmly support

3parallel imports’ (p. 169). The size of the grey market in the US as far back as themid-1980s has been estimated at $US7b (MS p. 168) and grey market car salesalone in Germany have been estimated at US$6b (Gallini and Hollis, 1999, p. 2).

The economics of grey markets are, in principle, straightforward. The literature4considers two broad reasons why grey markets might arise: one is to arbitrage

away international price discrimination, the other is to free-ride on investmentsmade by intellectual property right (IPR) holders. In the first of these, a holder ofan IPR in some good (by definition a monopolist) would like to set different pricesin different markets with different elasticities of demand. Parallel imports removethat ability and enforce uniform pricing on the monopolist.

It is well known that imposing uniform pricing on a 3rd degree pricediscriminating monopolist might reduce aggregate welfare if it leads to smallmarkets — that would otherwise be served — being dropped. In what is perhapsthe leading theoretical analysis of this issue in an international setting, MS notethat uniform pricing may be welfare-reducing, from a global perspective, ifdemand dispersion is high enough. The losers from uniform pricing are, of course,

2But a number of recent decisions have supported the view that restrictions on parallel importsoriginating outside the Union are quite permissible. In Silhouette International Schmied GmbH & CoKG v. Hartlauer Handelsgesgesellschaft GmbH [1998] ETMR 539 the European Court of Justice(ECJ) ruled that a trademark proprietor’s rights in the European Economic Area (EEA) were onlyexhausted once the goods were placed on the market in the EEA. This was re-affirmed in Sebago Incand another v. GB-Unic SA [1999] All ER (D) 706 when the ECJ stressed that the relevant part of theEuropean Trade Marks Directive meant that trademark rights were only exhausted when products wereplaced on the EEA market (although another decision suggests that initial sale outside the EEA cangive implied consent for goods to be sold on into the EEA depending inter alia on relevant local laws.See Zino Davidoff SA v. A&G Imports Ltd [1999] All ER (D) 502.)

3See Maskus and Chen (1999) for a recent discussion of parallel import policy in a number ofcountries.

4There are many other explanations too, of course. Frequently, parallel imports simply arbitrage ‘firesales’ internationally — rather than being a long-run phenomenon, parallel importers specialise inone-off job lots. Another possibility is that international price discrimination reflects differingintellectual property regimes so that in countries that are lenient towards pirating, authentic distributorswill optimally charge lower prices. Parallel imports then arbitrage these policy differences, sourcing inthe low-price countries to sell in those where pirating is more strictly controlled. And, Maskus andChen (1999) have recently shown that parallel imports can arise endogenously in a situation of verticalprice control between a manufacturer and a downstream distributor: efficient two-part pricing mightdictate a low per-unit wholesale price but this makes parallel exporting attractive if it is less than theretail price abroad (less trade costs). They find some empirical support for this argument.

M. Richardson / Journal of International Economics 56 (2002) 233 –245 235

5the small countries that might be dropped. Yet the countries listed above as recentliberalisers of parallel import restrictions — New Zealand, Australia and Singa-

6pore — are all small countries (in the sense of international economics).Why is this? MS note that a ‘mixed’ system in which countries are grouped and

each group faces a uniform price internally will, for appropriately chosen groups,typically welfare-dominate (from a global perspective) any pure system of eitherglobal uniform pricing or global price discrimination. But what would weanticipate if we look not at global welfare but rather at the incentives facingindividual countries? Would some countries — low elasticity, high price ones —allow grey markets while others do not?

This paper considers an international policy-setting game in which countrieschoose, simultaneously and non-cooperatively, domestic policy on grey markets.In the next section we set up a simple model focusing only on price discriminationas a rationale for parallel imports to argue that any Nash equilibrium to such agame effectively involves de facto global uniform pricing. Section 3 considerssome extensions and qualifications of the basic insights looking at tariff-setting,political economy issues and the effects of allowing restrictions on re-exports. Afinal section concludes.

2. The basic result

Consider a world of n 1 1 countries indexed by i 5 0, 1, . . . , n. A monopolistfirm in country 0 produces a homogeneous good sold, potentially, in all n 1 1countries under the canonical conditions of international trade theory: zerotransport costs, non-decreasing production costs and full information on (well-behaved) demand conditions. Demand for the product in country i 5 0, 1, . . . , n isgiven by x ( p ) where p is the price charged in country i. The firm’s costs arei i i

ngiven by C(X) where X ; o x , C9(X) . 0 and C0(X) $ 0. Welfare in countryi50 i

i 5 1, 2, . . . , n is simply consumers’ surplus whereas in country 0 welfare includes

5In their analysis ‘smaller’ corresponds to ‘more elastic demand’ as they look at linear inversedemand curves of the form p 5 a(1 2 q) and look at dispersion in a affecting both the slope and theprice intercept of the demand curve. In such a linear model aggregate output is unaffected by a switchfrom discrimination to uniform pricing so long as all markets are still served so welfare would rise insuch a case.

6To focus on one of these, in May 1998 New Zealand unilaterally removed prohibitions on parallelimports of copyright goods. The US immediately responded by announcing a special 301 out-of-cyclereview of New Zealand. While there are some special circumstances in the New Zealand case given theextensive reach of its copyright legislation (see Richardson (1999) and Wood and Scholes (1998)), it isby no means alone in permitting parallel imports.


the global profits of the monopolist. If we denote by a the ‘choke price’ in countryi21i (the price at which demand just falls to zero, so a 5 x (0)) then W 5 CS 1i i 0 0

a n a0 ip 5 e x s ds 1 o p x 2 C X and W 5 CS 5 e x s ds for i 5 1, 2, . . . , n.s d s d s dp 0 i50 i i i i p i0 i

9Thus ≠W /≠p 5 2 x p , 0, i 5 1, . . . ,n and ≠W /≠p 5 p 2 C9 X x , 0 whens ds d f gi i i i 0 0 0 0

9p is chosen to maximise profits. Note too that ≠W /≠p 5 x 1 p 2 C9 x fors d0 0 i i i i

i . 0. This last expression is zero, either because the country is not served, or bythe firm’s FOC. We assume that the firm’s problem has an interior solution for atleast some markets: a . C(0) for some i.i

Suppose the monopolist can price discriminate across all markets. Let S ; i:h* *x p . 0 denote the set of countries that are served in this case where p is thes d ji i i

price charged to country i under price discrimination: so S is the set of countries inwhich there are strictly positive sales under global price discrimination. Denote its

*complement by N so that N ; i: x p 5 0 . Suppose that, under global uniformh s d ji i

pricing in i 5 0, . . . , n (that is, when the monopolist must charge the same price inevery market) it maximises profit by setting p 5p and sells x (p) in country i fori i]] ]total sales of X. Let S ; i: x p . 0 denote the set of countries that are served inh s d ji] ] ]this case and denote its complement by N so that N ; i: x p 5 0 . Finally, weh s d ji] ] ]consider first only two policy extremes for countries: either parallel imports arepermitted with no restrictions or they are prohibited outright. Let I be an indicatori

variable, which takes the value 1 for countries that permit parallel imports and 0for countries that do not.

Our conclusions depend on the following:

Key assumption. Consider any two countries, i and j, which are both served under* *price discrimination and face prices p . p , respectively. Under our maintainedi j

assumptions, if these two were to be treated as a single market they would face a* *common price p [ [ p , p ] and welfare in country i ( j) would be weakly higherj i

7(lower) than with price discrimination.

9 99We assume henceforth that x , 0 and x # 0. This is assumed simply to give ai i

unique global maximum to the firm’s problem. In fact, our propositions will applyin any world where our Key assumption holds (for which these restrictions aresufficient).

We consider a simple two-stage game with the following structure: first, allgovernments simultaneously choose whether to permit or prohibit parallel imports;second, the monopolist sets a price in each country. If this involves a higher pricein a country that permits parallel imports than in some other country then arbitragewill occur from the latter to the former (parallel imports) and the monopolist’s

7See Tirole (1988, pp. 137–138).


profits will be lower than if it were to set a uniform price that ‘groups’ the twocountries together in the sense of treating them as a single market. Suppose,

*initially, that either 0 [N or 0 [S and p ,p. We can now state our central result.0] ] ]

Proposition 1. Consider the one-shot policy game involving the simultaneous andnon-cooperative choice of parallel import policy by all countries. In any Nashequilibrium to this game, only countries i [S are served and p 5p ;i, j . 0, i,i] ]j [S.

]

Proof. Suppose not. Consider some country i ± 0, i [ M where M denotes the setof countries other than the monopolist’s home country facing the highest price in a

* * *discriminating equilibrium: M ; k: p 5 max p , . . . , p . Similarly, let Jh h jjk 1 n

denote the set of countries facing the lowest price in a discriminating equilibrium:* * *J ; k: p 5 min p , . . . , p . While J and M may be singletons, they are clearlyh h jjk 1 n

non-empty. So no country (other than possibly the monopolist’s home country)faces a higher price than country i or a lower price than any country j [ J. Thiscan only occur if I 5 0. Suppose country i were instead to set I 5 1 i.e. it were toi i

permit parallel imports. It would then be grouped by the supplier with somecountry j [ J and treated as a single market. By our Key assumption, welfare incountry i would be higher than with price discrimination i.e. I 5 0 could not be ai

Nash equilibrium. Accordingly, all countries i . 0 that are served must face the8same price and p 5 p ;i, j [S, as claimed. Furthermore, I 5 1 ;i [S such thati j i] ]

*p . p .i i

9This result says that we effectively observe global uniform pricing and theintuition behind it is very simple. The countries that would like to permit parallelimporting are those that are discriminated against in its absence. So ‘high-price’countries can ‘undo’ price discrimination. While high-elasticity demand countries

8A referee has noted that allowing parallel imports is, in fact, a weakly dominant strategy for everycountry in that a country can do no worse allowing parallel imports than prohibiting them regardless ofthe policy choices of other countries.

9Technically there are multiple equilibria here depending on the policy choices of both the countries*in N and those in S that would face p ,p in the absence of parallel imports (these latter might prohibiti] ] ]parallel imports but with no effect on the equilibrium price). Clearly these equilibria are all equivalent

*to global uniform pricing. The only exception that might arise is if 0 [S and p . p where p ,p is0 E E] ]the uniform price that would be charged to all export markets if 0 [S but country 0 prohibits parallel]

imports. If country 0 then permits parallel imports it will lead to a uniform price of p — lower at home]but higher in the rest of the served markets than p . While the sum of consumers’ surplus and profits inE

its own market must increase with this, if the decrease in profits from the served export markets issubstantial it could more than offset this. In that case the source country would prohibit parallelimports. Nevertheless, all foreign markets will still face a uniform price, as in Proposition 1.


might favour discrimination, in this set-up they cannot enforce it globally when10high-price countries permit grey markets.

We close this section with a final observation. As noted earlier, MS show thatworld welfare may be higher than with either complete price discrimination oruniform pricing in a ‘mixed’ system in which countries are grouped. Themonopolist can then discriminate between the groups but charges a uniform pricewithin a group. Clearly this does not affect the world of Proposition 1.

3. Extensions and qualifications

Our initial query was motivated by the observation that real-world practice doesnot conform to the predictions of economic theory: it is frequently small countrieswho have pursued parallel import liberalisation most eagerly. This might beattributed to free-rider behaviour in the broad area of intellectual property (seeBarfield and Groombridge (1998)) but we have suggested, in a very simple andstylised model, that there is a case for all importing countries, large or small, topermit parallel imports. However, of course, we do not observe this in practiceeither. In this section we consider three extensions and qualifications to the aboveanalysis: tariff setting, political economy considerations and the effects of ‘parallelexport’ restrictions.

3.1. Tariffs and parallel imports

The model of the previous section is one in which countries have a single policyinstrument: prohibition or permission of parallel imports. In a more realistic settingcountries can also choose other instruments such as tariffs. Knox and Richardson(1999) consider a two-country model in which tariffs are also available togovernments and show that while permitting parallel imports is always attractivein the absence of tariffs (e.g. due to multilateral or bilateral trade agreements) itmay not be attractive at all if even a small country can levy an optimal tariffagainst the monopoly. In any case, the relative attraction of permitting parallelimports is always greater when tariffs are not available. This does not auto-matically invalidate Proposition 1, however. While tariffs reduce the return to the

10This result seems robust to repeated game complications. The usual complication repetition adds toa one-shot full information game is that, while repetition of any Nash equilibrium to the one-shot gameis still a Nash equilibrium in the repeated game, there is a much richer variety of strategies agents canplay and this can sustain other mutually-beneficial outcomes through appropriately chosen punishmentstrategies. However, in the simple setting of this section in which the strategic players are governmentsonly, repetition changes nothing. The reason is that no combination of actions by the countries can raisethe welfare of the country facing the highest price in any discrimination equilibrium compared to theequilibrium of Proposition 1. Hence, as in Proposition 1, any other outcome ‘unravels’ iteratively.


monopolist, allowing parallel imports is always attractive to high price countries.Only if the range of prices that would prevail in the absence of parallel imports isnot too great will the availability of tariffs disrupt the logic of Proposition 1 (inthat a relatively high price country might prefer to prohibit parallel imports).

3.2. Political economy considerations

In this model (and in Knox and Richardson (1999)) countries desire to below-price destinations for the monopolist’s exports. This is based on thegovernment maximising economic welfare as traditionally understood but thereality of trade policy setting in most countries is that it is driven by ‘politicaleconomy’ factors. There are a number of complications involved in introducingsuch issues into the parallel import setting, however. First, many such models aredriven by the concerns of import competing producers but, in this setting, theimported product is necessarily produced by a monopoly. Further, internalresistance to parallel imports in practice has typically been expressed by localdistributors of IPR goods, not by import-competing producers. As the surplusaccruing to distributors can be extracted by the monopolist wholesaler throughlicensing fees, one might suspect there is little to be gained from lobbying in anequilibrium model where policy is fully anticipated. We show now, however, thatin a simple model in the spirit of Grossman and Helpman (1994) (G&Hhenceforth) parallel imports may be prohibited by active lobbying.

Consider a two-country model in which countries A and B both consume a goodproduced by a monopolist in country B. Suppose that country A faces the higherprice if the markets are segmented. The monopolist licenses the sale of the productto a local distributor in country A and charges a license fee, L. The localdistributor realises a profit of p and retains r 5 p 2 L 2 l where l is a lobbyingA A

`payment to the government of A. The government in country A seeks, a la G&H,to maximise U 5 l 1 g [CS 1 p 2 L] where CS denotes consumers’ surplus inA A A A

11A and g is a weight placed on economic welfare.We suppose that the timing of actions is as follows. In the first stage the

monopoly producer sets the license fee, L. The second two stages constitute aG&H-type game: the licensee in A determines its lobby contribution, l, to offer

11As in G&H this comes from maximising a weighted sum of lobby contributions and economicwelfare in which the post-contribution (net) profits of the domestic firm appears, so long as the weighton the former exceeds the weight on the latter. Our model has little of the richness of G&H, note, as wedo not consider rival lobby groups due to the nature of the monopoly market considered here.Nevertheless, the timing, objective function of the government and the rationale for lobby payments aremuch as in the G&H model and the interested reader is referred there for a more complete explanationof the underlying model.


the government and, in the third stage, the government decides whether or not topermit parallel imports and collects the associated lobby payment, the monopolistprovides the good to the distributor and the market clears. If parallel imports areprohibited optimal behaviour by the monopolist is to supply the good at marginalcost (extracting what it can through the license fee); otherwise it supplies it at theoptimal uniform price across the two markets, p. We seek a subgame perfect

] 12equilibrium to this game; accordingly, we solve backwards.Suppose, in the third stage, that no lobbying were done (l 5 0) so parallel

imports were permitted. The payoffs to the monopolist, the distributor and thegovernment in A are then, respectively:

pip 5 L 1 p ps dT B ]

pir 5 p p 2 L (1)s dA ]

piU 5 g CS p 1 p p 2 Lf s d s d gA A A] ]

where a pi superscript indicates that parallel imports are permitted and p denotesT

the total profits of the monopolist wholesaler.Now suppose, instead, that lobbying occurs and in the third stage parallel

imports are not permitted. The corresponding payoffs will then be as follows:

p 5 L 1 p ps dT B B

r 5 p 2 l 2 L (2)A

U 5 l 1 g CS p 1 p 2 Lf s d gA A A A

where the lack of superscripts indicates that parallel imports are not permitted andp denotes the (discriminatory) retail price in country j5A, B.j

piThe government in A will prohibit parallel imports iff U $ U i.e. from (1)A A

and (2), if l 1 g(Dp 2 L) $ g(DCS 2 L) where DCS 5 CS (p) 2 CS ( p ) . 0 andA A A A]Dp 5 p ( p ) 2 p (p) . 0. So in the second stage, given L, the distributor in AA A A A ]maximises its payoff (r in (2)) by minimising l subject to this ‘participation’

13constraint for the government, implying that the latter holds with equality:

l 5 g DCS 2 Dp . (3)s dA

12Issues of the government ‘reneging’ — accepting the contribution but then allowing parallelimports anyway — do not arise here as the lobby payment is only made contingent on the parallelimport regime chosen: the distributor’s choice in the second stage is simply a (binding) offer — a menuof options for the government.

13Note that the maximised value of p is unaffected by the choice of l as the latter is a lump sumA

payment to the government.


piHaving parallel imports barred is only desirable for the distributor if r . r i.e.14from (1) and (2), if l # Dp or, from (3), if:A

g]]Dp $ DCS. (4)A 1 1 g

Subject to this condition (which is purely parametric) in the first stage themonopolist maximises p in (2) by maximising L given the distributor’sT

‘participation’ constraint (r $ 0) implying that the latter also holds with equalityor, from (2):

L 5 p 2 l. (5)A

Violation of (4) implies that there is no value of l that the subsidiary is willingto offer that would induce the government to prohibit parallel imports. So long as(4) does hold, the equilibrium lobby payment and license fee are given in (3) and(5).

Consider a linear case in which the monopolist produces at a constant marginalcost c and (inverse) demand in each country is given by:

p 5 a 2 bDA A (6)p 5 a 2 bDB B

Our presumption that A faces the higher discriminatory price now requiresa . a and without loss of generality we henceforth set b to unity. It isstraightforward to show that

2b a 2 as d]]]Dp 5 . 0A 24 1 1 bs d

and

14An alternative way to solve this problem is to recognise, as noted earlier, that the final two stagesconstitute a very simple and limiting version of the common agency game adapted by G&H andKonishi et al. (1999) in which there is a single principal only. By Proposition One of Konishi et al.(1999), any coalition-proof equilibrium here will involve a parallel imports policy choice thatmaximises the joint welfare of the distributor and the government in A. That is, parallel imports will be

pi piprohibited iff U 1 r 5 g [CS (p) 1 p (p) 2 L] # gCS ( p ) 1 (1 1 g )(p ( p ) 2 L) 5 U 1 r whichA A A A A A A A A A] ]can be rewritten as condition (4) in the text. The lobby payment is simply a transfer that affects the

distribution of that joint surplus across these two players. Further, the structure of our problem is one ofa single principal so it (the distributor) can extract the entire surplus from the lobbying relationship. Itwill therefore set its lobbying payment such that the government’s surplus is reduced to its reservationlevel, which gives us condition (3).


a 2 as d]]]DCS 5 b a 2 a 1 2 1 1 b a 2 c . 0.f s d s ds dg

28 1 1 bs d

Hence we can rewrite condition (4) as (7):

2b a 2 as d]]]]]]]]S Dg # ;g (7)2 1 1 b a 2 c 2 b a 2 as ds d s d ]

Thus if g #g we will observe the prohibition of parallel imports; otherwise]parallel imports will be permitted. Inspection of (7) reveals some intuitive results:

a prohibition on parallel imports is more likely, ceteris paribus, the lower is g (theweight on economic welfare), the lower is a (the price intercept in the othercountry) and the higher is a (the domestic price intercept), c (marginal cost) and b(the slope of the domestic demand curve). The lower is g the more important tothe government are lobbying contributions hence prohibition of parallel imports ismore likely (although, from (3), the government is no better off in equilibriumwith such imports than without: although it receives lobby payments these exactlyequal the welfare-weighted loss of consumer surplus and gain in distributor’s profitfrom prohibiting parallel trade). The other results all follow for the same reason:for instance, a lower a (greater dispersion of the demand curves in terms of chokeprices) indicates increased profitability from price discrimination and thus greaterlobbying.

Finally, from (5), the domestic distributor makes zero net profit in equilibriumhere, even though parallel imports are prohibited: the license fee extracts all profitthat is not contributed as lobby payments to the domestic government.

How does this tie into the model and results of the previous section? Thisanalysis suggests that if governments are motivated by political economy concernsthen even high price destinations may choose to prohibit parallel imports. In such acase, of course, Proposition 1 would no longer apply. However, the lower thedemand dispersion (in terms of choke prices) the less likely is prohibition ofparallel imports in high-price countries (in contrast to the tariff-setting case)because of the reduced gains from discrimination and thus lower lobbyingexpenditures.

3.3. Parallel export restrictions

The third and final extension of our earlier model that we consider relates towhat might be called ‘parallel exports’: the re-export of licensed sales from lowprice countries. Proposition 1 suggests that one set of beneficiaries of parallelimport restrictions — countries that face low prices in a discriminatory outcome— cannot do anything to prevent global uniform pricing in equilibrium. As MSnote, however, there is one way that countries that are favoured by internationalprice discrimination can encourage it, even when others permit grey markets, and


that is by prohibiting the re-export of licensed sales. Thus a prohibition on parallelexports could retain international price discrimination. So consider the one-shotpolicy game involving the simultaneous and non-cooperative choice of I by alli

countries along with the choice of whether or not to prohibit parallel exports. Inthis case we get the following result:

Proposition 2. Consider the one-shot policy game involving the simultaneous andnon-cooperative choice of parallel import and export policy by all countries. Inany Nash equilibrium to this game, only countries i [ S are served and are

*charged prices p .i

Proof. If any served countries are grouped together and charged a uniform pricethen, by our Key assumption, any country in the group which would receive alower price if discrimination were permitted can obtain that price by prohibitingparallel imports and exports. So no dissimilar countries can be grouped inequilibrium.

So now it is ‘low-price’ countries that ‘undo’ uniform pricing and we effectively15observe global price discrimination.

While this is a theoretical possibility, the prohibition of parallel exports is not apolicy one sees enacted in practice, perhaps for reasons of policing difficulties,latent mercantilism and a perception that this is a policy that serves private ratherthan national interests. Our analysis to date has taken the behaviour of themonopolist as essentially passive. And yet one might anticipate that the monopolymanufacturer would desire to take steps to prohibit parallel trade, perhaps throughcloser integration into or control over distribution channels (as has been suggestedin the case of Japan where government policies might permit parallel imports de

16jure while private practices prohibit them de facto) or through explicit controlson re-exports. Indeed, there is evidence that some manufacturers do attempt to

17control this behaviour (see Michael (1998)). Interestingly, however, a recentdecision in Spain has questioned such steps — a pharmaceutical company (GlaxoWellcome) employed a dual pricing system with one price for products soldthrough Spanish pharmacies and a higher price for those sold to Spanishwholesalers who were deemed to be the source of parallel exports into the rest ofEurope. Spanish legal authorities ordered in December 1998 that this dual pricing

15Again there are multiple equilibria here depending on the policy choices of the countries in N butnow they are all equivalent to global price discrimination. I am grateful to a referee for noting, too, thatthe choice of parallel import regime in this setting is redundant: whether or not countries permit parallelimports, parallel export restrictions ensure that they do not occur.

16See also the analysis of Maskus and Chen (1999).17However, only 18% of respondents in Michael’s (1998) survey of US manufacturers reported that

they would prohibit parallel exports of their products under all circumstances, indicating that it canserve international marketing purposes other than simply arbitraging third degree price discrimination.


scheme be suspended pending a further ruling; since then the European Commis-sion’s competition directorate, DGIV, has notified the company that it perceivesthis pricing system to be a restriction of competition in violation of Europeancompetition rules.

4. Conclusion

We began by noting that recent policy reforms by a number of countries haveinvolved relaxing restrictions on parallel imports and that it has frequently beensmall countries that have liberalised in this fashion. This runs counter to theobservation that under uniform pricing it is small countries that might suffer frombeing ‘dropped’ by a monopolist supplier. In this paper we have argued that, in asimple price discrimination model where countries choose their parallel importingregime simultaneously and non-co-operatively, any Nash equilibrium is effectivelyone of global parallel importing. This perhaps renders less surprising theobservation that policy-makers globally are sympathetic to grey markets, despitetheir ambiguous consequences for global welfare.

Our result begs the question of why we do not then observe all countriespermitting parallel imports. One explanation, of course, is that parallel importsmay be driven by more than arbitrage across a discriminating monopolist’smarkets. Even in such a setting, however, we have examined a number of otherqualifications and extensions which would temper the stark and rather stylisedresult derived here.

Acknowledgements

I am grateful to Alan King for a conversation that stimulated this paper and tothe editor and two referees for very useful comments. The usual caveat applies, ofcourse.

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An elementary proposition concerning parallel imports