JITEDStarve - Parallel Imports and the lot of a Starving...

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Parallel Imports and the lot of a Starving Artist Abstract This paper studies the role of copyright in the market for cultural output and how parallel imports affect the structure of incentives faced by artists. It demonstrates that parallel imports affect the distribution of income between generations of artists, raising the income of younger artists while reducing the income of superstars; the net outcome being a decline in the number of artists producing cultural output. Optimal subsidies to offset this decline can either involve a subsidy to starving young artists and no subsidy for superstars or the opposite outcome depending on governments at- titudes towards the distribution of income. Keywords: Parallel Imports, Copyright, Intellectual Property Rights JEL Classification: F13, F14, O34 1
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1 Introduction The question of the exhaustion of an intellectual property right relates to determining at what point the original creator of the intellectual property relinquishes control over their creation. Intuitively one would expect that the sale of a product extinguishes the rights of the original creator over control of the further resale of that product. However, this is not generally the case. A prominent example is the attitude many countries have towards parallel imports. Parallel imports are authentic products, not counterfeits, imported into a country by an unauthorized distributor. A typical scenario is one where a firm owns the intellectual property of a good in several countries (e.g. copyright of a book or sound recording), with this right conferring exclusive control of the production of the product in each country. Parallel importing occurs when another party obtains the product in one of these countries (from a legitimate source) and diverts it to one of the other countries without the authorization of the owner of the intellectual property. In this sense the unauthorized product serves the market in “parallel” with the authorized product. 1 Many countries take the position that the sale of a copyrighted good does not extinguish the international rights of the copyright holder and therefore ban parallel imports. 2 A decision to ban parallel imports leads directly to international market segmentation, and consequently the analysis of parallel imports to date has focused on static models of either price discrimination (Malueg and Schwartz, 1994; Richardson, 1999) or vertical price control (Maskus and Chen, 2004). One shortcoming of this static approach to parallel imports is that it does not provide a role for intellectual property rights. In contrast this paper studies the role that intellectual property rights play in providing an incentive to innovate and how the admission of parallel imports can affect both the structure of incentives faced by innovators and the level of creative output. In particular this paper focuses on the market for creative expression, such as books and music, and analyzes the impact that amending copyright law to allow for parallel imports has on this market.
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