Parallel trade, product quality, and welfare

- We study the welfare effects of parallel trade (PT) considering R&D investment.
- Quality may be higher under PT, depending on consumers' preferences for quality.
- Consumer surplus may rise (fall) in the PT-source (PT-recipient) country.
- Ex post welfare is lower with than without PT, but total consumer surplus rises.
- Improving quality is a necessary condition for PT to increase welfare ex ante.

We study the welfare effects of parallel trade (PT) considering investment in quality. We thus revisit the case for PT in research-intensive industries. We find that PT may raise quality, depending on how preferences for quality differ across countries. Conditional on quality, consumer surplus may rise (fall) in the PT-source (PT-recipient) country. While PT reduces ex post welfare, improving quality is a necessary condition for PT to increase welfare ex ante.