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Parallel trade with an endogenous market structure
Author(s) -
Shih PeiCyuan,
Hwang Hong,
Peng ChengHau
Publication year - 2019
Publication title -
the world economy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.594
H-Index - 68
eISSN - 1467-9701
pISSN - 0378-5920
DOI - 10.1111/twec.12727
Subject(s) - welfare , product (mathematics) , economics , domestic market , distributor , product market , market structure , international trade , international economics , commerce , market economy , microeconomics , mechanical engineering , geometry , mathematics , engineering , incentive
Abstract This paper sets up a two‐country model in which there is one domestic manufacturer authorising its product to a distributor in the foreign country. The distributor can sell the product not only to its own market (i.e., the foreign market) but also back to the domestic market. The latter is called parallel trade (PT). The paper investigates the effects of PT on the profits of the manufacturer and social welfare if the domestic market structure is endogenously determined. It is found that PT should be encouraged rather than banned as it increases not only the profits of the manufacturer but also the welfare of both the domestic and the foreign countries.