Executive Summary
Would New Zealand benefit from the removal of the current parallel importing restriction in the Copyright Act 1994?
The analysis in this report uses an economic framework to answer that question. By reviewing the literature, we identify the benefits and detriments associated with a parallel importing restriction. The relative size of these impacts will depend, at least in part, on the characteristics of the goods and the markets. We estimate the net effect in each of three specific markets (cars, books and CDs) and discuss whether the analysis of the three markets can be generalised.
The standard economic measure for estimating the effects of a regulatory intervention, such as a parallel importing restriction, is the change in consumer and producer surplus measured in dollar terms. We try to work out the gain to consumers and the loss to producers as a result of changes in the market price and quantity. If consumers gain more than New Zealand producers lose, there is a net welfare gain. This analysis is somewhat more complicated when the impact on overseas producers or importers is taken into account.
We expect the imposition of a parallel importing restriction, or the removal of one, to change the incentives operating on market participants. The report discusses the expected impacts on each of the market participants as a result of the removal of a parallel importing regime.
Innovators
- lower overall return if parallel imports undermine price discrimination
Parallel imports provide a degree of competition that may not be available simply from interbrand competition. Because of the differentiation between copyright products, each seller has a degree of market power which may prevent the consumer from enjoying the lowest possible prices. Parallel imports provide an opportunity for international arbitrage, which, by definition, will reduce the returns to the innovator. - possible reduction in the incentive to invest in innovation
Creating incentives to innovate is the key rationale for the existence of copyright. If parallel importing undermines the returns that innovators can earn on their investment, the amount of future investment could fall. This was considered unlikely in each of the markets studied because New Zealand was such a small part of the world market for those goods.
Domestic Agents
- possible reduction in the incentive to introduce products to New Zealand
If exclusivity over the distribution of a product in New Zealand can't be guaranteed, firms may be unwilling to incur the costs required to bring new products to New Zealand. The markets examined in this report did not appear to support this argument. - possible reduction in support services such as pre and after sales service
Without the exclusive right to sell a good in a particular market, the supplier may not be willing to make the optimal amount of investment in marketing, the provision of repair facilities or other such services because of the possibility of consumers and parallel importers free riding on those investments. The experience in the car market, where such services are particularly important, suggests that competition may, in fact, improve after sale service.
Retailers
- increased choice of suppliers
retailers will be able to choose between a range of suppliers and identify the one with the best combination of price and service.
Consumers
- lower prices for some goods
where the cost of a copyright good is significantly higher in New Zealand than elsewhere, the removal of the parallel importing restriction could encourage international arbitrageurs to parallel import the good into New Zealand for a lower price than consumers currently pay. This could lead to higher prices in some other areas where the distributor has more market power and parallel importing is not attractive, although we would expect distributors to be already exploiting such opportunities. - access to a greater range of goods
consumers may get access to a greater range of goods if retailers or parallel importers bring a wider variety or products into New Zealand. The threat that consumers would have a narrower selection of goods if distributors find New Zealand a less attractive place to conduct business, is not born out by the experience of the car market. - possible quality changes
consumers may experience a reduction in welfare if the quality of parallel imported products is not as high as New Zealand produced or officially distributed products, and are unaware of the differences between the two sources.
We investigated the likelihood of these effects in three markets for copyright goods. In order to estimate the change in welfare, we need to know prices and quantities both with and without the parallel importing restriction, as well as be able to isolate out all other influences on the market. This is a tall order. We have had to make a number of simplifying assumptions, so that the figures we report should be treated as ball park indicators.
- Motor vehicles: in this market we tried to measure the effect of the removal of import licensing in 1989, assuming that this change was equivalent to the removal of the parallel importing restriction in that market. We estimate the welfare gain from such a change was about $590 million. However, there were some issues to do with quality, safety and the provision of after sales service. These have either been dealt with by market changes or are under review.
- Books: the price survey showed that New Zealand consumers are paying more than consumers in some other countries. Although some caution is needed in interpreting these comparisons, on balance we feel that the price in New Zealand would fall if parallel imports were permitted. All book buyers interviewed felt that they could access more material at lower prices if parallel importing were permitted.
- CDs: similar results to the book price survey were found with the CD price survey. The main additional feature of the CD market was the potential for increased availability of pirated products. This is a legitimate concern of copyright owners.
Conclusion
Based on the analysis of these markets, the net impact of removing the parallel importing restriction is likely to be positive. Where New Zealand prices for copyright goods are significantly higher than prices in other countries, parallel importing could introduce a degree of competition not currently available. If the current level of interbrand competition is strong enough to produce the best result for the consumer, parallel imports will not occur even without the restriction.
The main role of copyright is to encourage innovation. The marginal fall in returns that is likely to occur as a result of parallel importing in New Zealand is unlikely to influence the investment decisions of international innovators. However, there may be some impact on the domestic agents, as it may not be in the best interests of the international innovator to introduce policies designed to protect a licensee in a small economy.
The parallel importing restriction successfully prevents the importation of pirated goods and allows suppliers to maintain quality control through exclusivity. However, it is not clear that these are legitimate uses for the Copyright Act, or whether there is a net benefit to New Zealand from these uses of the Act.
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