Parallel trade, price regulation, and investment incentives

We study the case where parallel trade (PT) stems from government price controls in a foreign country. We remove the presumption that PT blunts dynamic efficiency if the government has partial commitment ability. We model the R&D firmÕs option to serve the foreign country, and find that PT may improve quality, depending on preferences for quality. Improving quality may be a sufficient condition for PT to raise global welfare ex ante. Under PT, quality may be higher with than without price controls.We discuss the role of bargaining power in price negotiations.