Parallel Trade, Quality Investments And Regulation

A manufacturer investing in product quality sells the good directly in her country, and abroad through an independent firm that practices international arbitrage (Parallel Trade). We show that: i) PT may increase investments if the re-imported product is of lower quality than the domestic product, but reduces investments with perfect substitutes; ii) price regulation (with PT) dilutes this result, since it anyhow raises investments when the investment cost is not too convex; iii) the regulated price determines whether the regulated country receives quality, but does not marginally affect investments. These findings lighten concerns about the long-run welfare effects of PT.