Parallel Imports and Product Quality in the Presence of Price Control

ABSTRACT This research analyzes a manufacturer's quality choice for products sold in different countries in the presence of parallel import (PI). When PI is feasible, a distributor may choose to sell products authorized by the manufacturer and/or import unauthorized products from a sourcing country. If the retail price in the sourcing country is subject to price cap regulation, the manufacturer has an incentive to lower the per‐unit wholesale price to marginal cost in order to prevent PIs by the distributor. Under such circumstances, it may become profitable for the manufacturer to downgrade the quality of the product sold in the sourcing country. Due to this quality degradation, global welfare declines if PI is allowed. These results hold whether the price cap is exogenously given or endogenously determined.