Why parallel trade may raise producers' profits |
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Authors: | Horst Raff Nicolas Schmitt |
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Affiliation: | a Institut für Volkswirtschaftslehre, Christian-Albrechts-Universität zu Kiel, 24098 Kiel, Germany b Department of Economics, 8888 University Drive, Simon Fraser University, Burnaby, Canada V5A 1S6 c Département d'économie politique, Université de Genève, CH-1211 Genève 4, Switzerland |
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Abstract: | This paper shows that a manufacturer may benefit from parallel trade. In addition to an intuitive condition about the effect of demand shocks, this occurs when competitive retailers must order inventories before they know the realization of demand and for products whose sale value drops at the end of the demand period. For these types of products, letting retailers trade unsold inventories generally results in larger orders placed with the manufacturer and higher manufacturer profit. The model provides a simple explanation as to why the volume of parallel trade is now very large and accepted by manufacturers for some products such as automobiles, clothes, toys, consumer electronics, musical recordings, cosmetics and perfumes. |
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Keywords: | Parallel trade Distribution |
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