Parallel Imports, Price Setting, and the Patterns of Trade - Reto Föllmi

DeFiPP Seminar

Abstract:

 We develop a simple framework of international arbitrage to understand how patterns of trade shaped by within- and between-country inequality. Introducing non-homothetic preferences in a Krugman-model, households in the rich North (poor South) are willing to pay high (low) prices for consumer goods; hence, unconstrained Monopoly pricing generates arbitrage opportunities for internationally traded products. Export zeros arise because some northern firms abstain from exporting to the South, to avoid international arbitrage. Rich countries benefit from a trade liberalization, while poor countries lose.

We show that a standard calibrated trade model (that ignores arbitrage) generates predictions on relative prices that violate no-arbitrage constraints in many bilateral trade relations. This suggests that international arbitrage is potentially important. Furthermore we show that both relative per-capita incomes and the overlap of the income distribution have a predictive power in a gravity equation.

 

Contact : Benoît Decerf - 4947 - benoit.decert@unamur.be
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