Working Paper No. 02-16

Product Innovation with Parallel Imports
Changying Li
October 2002

ABSTRACT

In this paper, we develop a theoretical model of product innovation in the context of parallel imports with endogenous investment. It is shown that, in contrast to the existing arguments, parallel imports have ambiguous effect on product innovation and may facilitate product innovation. We find that parallel imports discourage product innovation in the following cases: symmetric transportation costs, unrelated products or symmetric market sizes when these two products are not substitutes. In other cases, parallel imports may facilitate product innovation.

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