Import duty payment options for the parallel import channel: Duty-inclusive strategy versus duty-recovery strategy

Abstract

Many multinational manufacturers are expanding cross-border markets via authorized resale and parallel import channels. Unlike purchases made through authorized resale channels, consumers opting for parallel import channels encounter lower prices but face import duty issues and extended waiting times. Two primary payment strategies are typically adopted in parallel import channels to address import duties: one charges consumers the retail price along with import duties upfront (known as the duty-inclusive strategy), while the other charges only the retail price, with import duties pursued by Customs if the products are inspected (defined as the duty-recovery strategy). Despite its practical significance, this issue remains underexplored in the literature. This study develops a game-theoretic model to investigate the impact of duty payment strategies on dual-channel competition. Our analysis yields three main findings. First, a parallel importer will adopt the duty-recovery strategy when the additional waiting time due to back duties is limited. This strategy can ease price competition between the two channels, resulting in a joint increase in retail prices. Second, when the additional waiting time is moderate, the duty-inclusive strategy can benefit the parallel importer, authorized retailer, and manufacturer simultaneously. Third, the duty-recovery strategy enables consumers to potentially evade import duties, which results in a loss of government tariff revenue and, in most cases, a reduction in overall consumer surplus. To address this issue, this paper proposes a punitive tariff mechanism designed to induce parallel importers to abandon the duty-recovery strategy.