THE WELFARE IMPLICATION OF ALLOWING PARALLEL IMPORTS IN SINGAPORE : AN ECONOMIC ANALYSIS

Abstract

Parallel imports are genuine products imported by unauthorised resellers. Hence, they are legal as far as the products themselves are concerned. Yet, their legal status continues to inspire debate with regards to the means by which they are obtained and distributed. The problem of parallel imports is often viewed in two perspectives, both of which carry implications for policies concerning parallel imports. To consumers, parallel imports are seen as beneficial since they lead to lower prices in the market - the price hypothesis. To authorised distributors, however, parallel imports are seen as a bane as parallel importers free ride on their advertising and promotional efforts - the free riding hypothesis. To establish the legal status of parallel imports, we first survey legal cases involving parallel imports in both Singapore and the United States. The picture that emerges is that while parallel imports are generally supported by the judiciary in both countries, their legal status has not always been clear. Apparently, support stems largely from subscription to the price hypothesis. Support also derives from the belief that parallel imports are driven not so much by free riding but international price discrimination. To the extent that such beliefs form the basis for policies involving parallel imports, they should be substantiated by research quantifying the impact of parallel imports on consumers and authorised distributors. As such, the objective of this thesis is to provide an economic analysis of the welfare impact of parallel imports. Using simple market structure economics, I validate the price hypothesis for homogeneous products in this thesis. For products differentiated along the quality spectrum, the welfare impact of parallel imports is not as intuitive since price is not the sole variable of interest to consumers. The products of parallel importers and authorised distributors can differ in many respects such as after-sales service. Nevertheless, the game-theoretic model introduced in this thesis reinforces the observation of lower prices and higher welfare levels if parallel imports are allowed. Next, the free riding hypothesis is tested by comparing firms' choice of investment levels under different hypotheses of firms' behaviour. My results, though casting doubt on the free riding hypothesis, do not preclude the possibility that free riding can still occur. Taken together, my analysis strengthens the case for allowing parallel imports. At the same time, due attention should be paid to the claims of free riding by authorised distributors. In short, policies involving parallel imports should attempt to strike a balance between protecting consumers' and distributors' (and hence manufacturers') interests.