Parallel Trade and its Ambiguous Effects on Global Welfare

Abstract

The regulation of parallel trade is a fiercely debated issue in the global trading system. This paper investigates the welfare effects of parallel trade freedom for different levels of trade costs and market size. It is found that parallel trade freedom has a positive effect on global welfare if countries are sufficiently heterogeneous in terms of market size and trade costs are sufficiently low. Contrary to intuition, this result even holds in a situation where parallel trade freedom implies the closure of the smaller market. If, however, countries are virtually homogenous in terms of market size, parallel trade freedom may be detrimental to global welfare for specific levels of trade costs.