Abstract

This paper provides a rationale for parallel trade as an opportunistic behaviour by an international wholesaler having private information about local demands in two distinct markets where a multinational firm operates. This issue is illustrated in a screening game where the wholesaler signals on market sizes through the purchased quantities, that are selected from the menu of contracts proposed by the multinational firm. It is shown that asymmetric information enlarges the scope for parallel trade compared with complete information, that is, international arbitrage is made profitable by a lower (intermediate) price differential between the two countries. The perfect Bayesian equilibria of the game indicate that the prevailing effect of parallel trade is transferring profits from the multinational (generally, an innovative firm) to the wholesaler (a non innovative firm). It is also shown that the static welfare effects of parallel trade are ambiguous. In fact, parallel imports may enhance or reduce consumer surplus compared to market segmentation, depending on the costs of international arbitrage and the downstream market structure.