Regional exhaustion of intellectual property

• DOI: http://doi.org/10.1111/ijet.12031
• Author: Kamal Saggi
• Published date: 01 March 2014
• Date: 01 March 2014

doi: 10.1111/ijet.12031

Regional exhaustion of intellectual property

Kamal Saggi∗

This paper analyzes the causes and consequences of regional exhaustion of intellectual property,

a discriminatory policy under which a set of countries permit parallel imports from one another

but not from the restof the world. A three-country model is de velopedin which two high-income

countries jointly choose their common exhaustion policy among national (NE), international

(IE), or regional exhaustion (RE). The two high-income countries implement RE when they are

similar to each other and sufficiently high-income relative to the third country.Restricting their

choice set to only non-discriminatory exhaustion policies (i.e., NE and IE) makes all countries

worse off.

Key wor ds regional exhaustion of IPRs, national exhaustion, international exhaustion, parallel

imports, market power, welfare

JEL classification F13, F10, F15

Accepted 31 October 2013

1 Introduction

By virtue of their membership in the World Trade Organization (WTO), policies of almost all

major economies with respect to the protection and enforcement of intellectual property rights

(IPRs) must abide by the Agreement on Trade Related Intellectual Property Rights (TRIPS). In a

nutshell, this controversial agreement calls for virtually the complete harmonization of IPR policies

across WTOmember countries e venthough e conomicconditions and technological capabilities vary

dramatically across them. While TRIPS is far-reachingin terms of what it demands of WTO member

states in the realm of IPRs, there is an important set of policies that it leaves completely unregulated

and unconstrained, that is, policies pertaining to the exhaustion of IPRs. Article 6 of TRIPS says

that “nothing in this Agreement shall be used to address the issue of the exhaustion of intellectual

property rights,” a statement that grants wide latitude to WTO member countries with respect to

their exhaustion policies.

Exhaustion policies affect market outcomes by determining the legality of parallel imports—that

is, imports of goods protected by IPRs from foreign markets where they were originally sold by

∗Department of Economics, VanderbiltUniversity, Nashville, USA. Email: k.saggi@vanderbilt.edu

This paper is written in honor of Bill Ethier, one of the sharpest and wittiest economists whom I have had the honor of

knowing. Like most graduate students at Penn, I watched in aweas Bill expounded the theor y of international trade and

commercial policy without ever relying on any notes or slides, crutches that most of us cannot do without! His prolific

research contributions have left an indelible mark on the field. Not only havehis ideas proven to be fundamental, they

have been expressed with a beautiful economy of wordsthat few can match.

International Journal of Economic Theory 10 (2014) 125–137 © IAET 125

International Journal of Economic Theory