Why Parallel Trade May Raise Producers' Profits

This paper shows that a manufacturer may bene…t from parallel trade. In addition to an intuitive condition about the e¤ect of demand shocks, this occurs when competitive retailers must order inventories before they know the realization of demand and for products whose sale value drops at the end of the demand period. For these types of products, letting retailers trade unsold inventories generally results in larger orders placed with the manufacturer, higher manufacturer pro…t and higher consumer surplus. The model provides a simple explanation as to why the volume of parallel trade is now very large and accepted by manufacturers for some products such as automobiles, clothes, toys, consumer electronics, musical recordings, cosmetics and perfumes. JEL classi…cation: F12