Price Regulation and Public Service Obligations under International Arbitrage

Local regulation generates price differentials between countries that stimulate arbitrage by international distributors, which motivates vertical price-squeeze or non-price discrimination strategies by manufacturers. We show that: i) under either regulatory commitment or discretion, there are no monotonic relationships between technology/market conditions and the first-mover’s pricing; ii) regulators manipulate parallel exports to improve local welfare by imposing public service obligations on distributors; iii) to prevent sabotage, regulation should provide manufacturers with adequate countervailing incentives; iv) coordinating national agencies alleviates negative regulatory and market externalities. Thus, local regulation within regional exhaustion of intellectual property rights might underestimate static and dynamic efficiency concerns.