Parallel Imports, Market Size and Investment Incentive

We use a vertical control model with a two-part tariff pricing and a leader-follower competition to investigate some conditions which may prevent the occurrence of parallel importing even when such activity is legally permitted and the effects of parallel importing on the incentive to invest in market development effort for an authorised distributor faced with competition from parallel imported products. We find that parallel imports cannot arise if the target and the source market either differ too greatly or are too similar in size. Also, both the presence of parallel imported products and the threat of such presence reduce the domestic distributor’s market development investment. JEL Classification: L11, F13, 034