Parallel imports are a significant academic and policy issue. Official investigations into the impact of parallel imports on music CD prices have reached widely conflicting conclusions. This note reports an event study on an international panel of changes in copyright law to permit or disallow parallel imports. The study shows that, on average, legalization of parallel imports was associated with a 7.2–7.9% reduction in the retail price of music CDs.gray market, pricing

I.P.L. Png

Yeh-ning Chen

English

Research Papers in Economics

  1
Parallel Imports and Music CD Prices 
 
 
Yeh-ning Chen and Ivan Png
∗ 
 
January 2004 
 
Abstract 
 
Parallel imports are a significant academic and policy issue.  Official investigations 
into the impact of parallel imports on music CD prices have reached widely 
conflicting conclusions.  This note reports an event study on an international panel 
of changes in copyright law to permit or disallow parallel imports.   The study shows 
that, on average, legalization of parallel imports was associated with a 7.2–7.9% 
reduction in the retail price of music CDs.         
                                         
∗ National Taiwan University and National University of Singapore.     2
 
Introduction 
Parallel imports refer to the sale of genuine products outside of the market for which 
they had been authorized.  The price impact of parallel imports is a significant policy 
issue in international business.  For instance, the recording industry has asserted:  
•  “If parallel import restrictions are removed, imports will increase dramatically, 
mainly from developing markets … This will not result in reduced UK shop 
prices”  in evidence to the UK House of Commons (British Phonographic 
Industry 1999, Section 5), and 
•  “open parallel import does not necessary mean lower prices for the 
consumer” in a submission to the Hong Kong Legislative Council 
(International Federation of the Phonographic Industry, 2001). 
 
  Official investigations and studies of the price impact of parallel imports have 
reached widely conflicting conclusions.  “It seems unlikely that removing that right 
[of a copyright owner to control parallel imports] would lead to a reduction in the 
price of recorded music generally”, (MMC 1994, paragraph 2.183).   A study 
commissioned by the European Commission predicted that parallel imports would 
reduce music CD prices by just 0.6% (NERA 1999, Appendix C, page 27).  By 
contrast, the Australian authorities projected that parallel imports would reduce 
prices by 5-33% (Parliament, 1997, page 9). 
 
The previous quantitative studies were based on largely anecdotal evidence.  
This note reports an event study on an international panel of changes in copyright 
law to permit or disallow parallel imports.   The study shows that legalization of 
parallel imports had a significant effect on music CD prices.  On average, legalization 
was associated with a retail price reduction of 7.2–7.9%.  
 
Data and Model 
Parallel imports are governed by various branches of law including trademark and 
copyright (Gallini and Hollis 1999).   The core doctrine is that of territorial 
“exhaustion” of intellectual property rights.  In the case of national exhaustion, the   3
rights holder may prevent parallel trade with other countries, while in the case of 
international exhaustion, rights are exhausted upon first sale anywhere and parallel 
imports are permitted.
1  For instance, if Australia subjects Universal Music’s 
copyright over Mariah Carey CDs to international exhaustion, then Universal cannot 
legally prohibit trans-shipment of genuine Mariah Carey CDs from Singapore for sale 
in Australia. 
 
Through extensive legal research, we identified ten jurisdictions that revised 
the exhaustion provisions of their copyright laws between 1990-99 (Table 1).  
Generally, European countries tended to legislate against parallel imports, while 
Asia-Pacific countries liberalized.
2 
  
  For each of these countries, we collected the prices of music CDs and 
variables – household income, CD player ownership, and exchange rates – that 
would affect CD prices.   (We added the United Kingdom, which did not change the 
exhaustion provisions of its copyright laws during the period to provide a balanced 
sample of North American, European, and Asia-Pacific countries.) 
 
We focused on music CDs for several reasons.  As indicated above, there is 
tremendous policy interest in parallel imports of music.  Indeed, recorded music was 
one of the ten product categories selected for a European Commission study of 
parallel imports (NERA 1999, pp. 83-84).  Further, among copyrightable product 
categories, music CDs are quite closely priced across different artists and genres.  By 
contrast, in other copyrightable categories including computer software and books, 
there is wide price dispersion, which might possibly obscure the estimated effect of 
legal changes. 
 
                                         
1  The European Union has adopted the intermediate case of regional exhaustion, which 
permits parallel trade within the Union but not from outside. 
2  Singapore turned full circle.  In December 1993, the High Court ruled against parallel 
imports.  Then, in October 1994, Parliament amended the Copyright Act to over-rule the 
Court.    4
  Lacking sufficient data to estimate a set of structural demand and supply 
equations, we estimate a reduced form instead.  The dependent variable is the retail 
price of music CDs in US dollars. 
  
  Table 2 summarizes the data.  Euromonitor’s Global Market Information 
Database (GMID) provided data on retail prices for music CDs.  The panel began 
with 1993 as GMID data was available only from that year.
3  The indicator variable 
“Legal” takes the value 1 for years in which the copyright law permitted parallel 
imports of CDs, and 0 otherwise.  Among the other explanatory variables, increases 
in household income and CD player ownership would be expected to raise demand, 
and hence lead to higher prices.  The exchange rate was also included, as previous 
research has shown that exchange rates affect international pricing of differentiated 
products (Knetter 1993). 
 
Results 
Table 3, column (a), reports ordinary least squares estimates with retail price as the 
dependent variable and country fixed effects.  Consistent with the Hypothesis, the 
coefficient of “Legal” was negative (-0.439).  However, it was not significant.  All the 
country fixed effects were significant.  For brevity, the fixed effects are not reported. 
 
Changes in the law might not have been anticipated and hence would take 
time to affect pricing.  Accordingly, a lagged variable was introduced to characterize 
the legal changes.  This was defined to be 0 in years when parallel imports of CDs 
were disallowed and the year of any change to permit parallel imports, and 1 in 
years when parallel imports were permitted and the year of any change to disallow 
parallel imports.   
 
Table 3, column (b), reports the results with the lagged legal variable.  The 
coefficient of the lagged legal variable was negative and significant -0.944 (±0.418).  
In absolute value, it was more than double the coefficient of the (unlagged) legal 
                                         
3  From 2000, GMID changed its methodology to include pirated CDs, so the price series 
became significantly less reliable.  Hence, we limited our study to the years 1993-99.   5
variable, which was consistent with the conjecture that legal changes took time to 
affect pricing.  The coefficient of -0.944 suggested that a change in the law to 
permit parallel imports was associated with a US$0.94 decrease in the retail price of 
music CDs. 
 
In the regression in Table 3, column (b), the coefficient of CD player 
ownership was negative and significant.  CD player ownership ought to raise 
demand and hence increase price.  This result suggests that the equation was not 
correctly specified.  Accordingly, several alternative specifications were considered.   
 
The estimates in Table 3, column (c), included a time trend.  The coefficient 
of income was positive and significant, while the coefficient of CD player ownership 
was positive, but not significant.  The coefficient of the lagged legal variable was -
0.856 (±0.403), which was close to that in column (b).  Further, the coefficient of 
“year” was negative and significant, suggesting that this variable was relevant.  
Overall, this specification seemed better than that reported in column (b). 
 
The estimates in Table 3, column (d), specified the effect of time through 
separate indicator variables for each year.  For brevity, these coefficients are not 
reported.  Compared with column (c), this specification slightly improved the fit but 
much reduced the overall significance of the model.  All of the coefficients of the 
year indicator variables were negative, but only one was significant at the 95% level 
or higher.   
   
  In conclusion, the results support the Hypothesis and are not consistent with 
industry claims and the projections of the UK Monopolies and Mergers Commission 
and European Commission.  Changes in copyright law to allow parallel imports did 
have a significant effect on music CD prices.  On average, legalization of parallel 
imports was associated with a retail price reduction of US$0.86–0.94.  Given the 
average price of US$11.90, this reduction amounted to 7.2–7.9% in proportionate 
terms. 
   6
Concluding Remarks 
Our empirical results show that legalization of parallel imports reduced the average 
price of music CDs by 7.2–7.9%.  The price reduction was probably concentrated in 
relatively new, top-of-the-chart releases (NERA 1999, Appendix C, page 26; 
Papadopoulos 2000).  These results are suggestive of the impact of parallel imports 
on the markets for other copyrightable items, such as movies and electronic games, 
with high margin relative to transport cost and that involve relatively little national 
customization. 
 
A major limitation of the present study is the assumption that the price impact 
was identical across all countries.  Realistically, the price impact might vary from one 
country to another.  Accordingly, future research should employ longer time series to 
explore national differences in the impact of parallel imports.       7
References 
British Phonographic Industry, Ltd,  Supplementary memorandum to House of 
Commons Select Committee on Trade and Industry, 13 May 1999. 
 
Gallini, Nancy T., and Aidan Hollis, “A Contractual Approach to the Gray Market”, 
International Review of Law and Economics, Vol. 19 No. 1 (March 1999), 1-21. 
 
International Federation of the Phonographic Industry (IFPI), Letter to Legislative 
Council, Hong Kong, 24 December 2001. 
 
Knetter, Michael, “International Comparisons of Pricing-to-Market Behavior”, 
American Economic Review, Vol. 83 No. 3 (June 1993), 423-436. 
 
Monopolies and Mergers Commission (MMC), The Supply of Recorded Music, London, 
1994. 
 
National Economic Research Associates (NERA), The Economic Consequences of the 
Choice of a Regime of Exhaustion in the Area of Trademarks, Final Report for 
DGXV of the European Commission, London, 8 February 1999. 
 
Papadopoulos, Theo, “Copyright, parallel imports and national welfare: The 
Australian market for sound recordings”, Australian Economic Review, Vol. 33 No. 
4 (December 2000), 337-348. 
 
Parliament of the Commonwealth of Australia, Copyright Amendment Bill (No.2): 
Explanatory Memorandum, Canberra, 1997.  8
Table 1 
Changes to national copyright law affecting parallel imports
4 
 
Jurisdiction Date Change 
for/against 
parallel imports 
Details 
Australia July 
1998 
For Parliament  passed  Copyright 
Amendment Bill No. 2. 
Canada Sep 
1997 
Against  Section 44.4 of the Copyright Act (S.C. 
1997, c. 24) 
Hong Kong  Jun 
1997 
Against  Copyright Ordinance, No. 92 of 1997, 
Laws of Hong Kong 
Israel Dec 
1999 
Against Amendments  to  Copyright Act and 
Copyright Ordinance, 1721 Law of 
Israel 44   
Malaysia   1990  For   Copyright (Amendment) Act  
Netherlands Mar 
1993 
Against  Law on Neighbouring Rights, Article 6 
New Zealand  1998  For  Parliament repealed importation 
provisions of Copyright Act. 
Norway June 
1993 
Against  Copyright Amendment Act 
Singapore Dec 
1993 
 
Against  High Court ruling in Public Prosecutor 
v. Teo Ai Nee & Another, 1994, 1 
Singapore Law Reports 452. 
Singapore Oct 
1994 
For  Copyright (Amendment) Act, No. 14 of 
1994. 
USA Mar 
1998 
For  US Supreme Court ruling in Quality 
King Distributors v. L’anza Research 
International. (96-1470) 98 F.3d 1109, 
reversed. 
 
 
                                         
4 In compiling this data, I received valuable assistance from: Jacov Assaf, Interdisciplinary 
Centre, Herzliya, Israel; Mario Bouchard, General Counsel, Copyright Board Canada; and 
George Wei, National University of Singapore.   9
Table 2 
Summary Statistics 
 
Variable  Unit  Source  Min  Mean  Max  Std dev  
Retail price of 
music CDs 
US dollars  GMID*  5.85  11.9  23.7  4.32 
Per capita 
income 
Thousand 
US dollars 
GMID* 1.85  13.2  23.2  5.03 
CD player 
ownership per 
household 
 GMID*  0.132  0.469  0.830    0.208 
Exchange rate  US dollars   GMID*  0.130  0.594  1.67  0.395  
Legal    Table  1  0.000  0.345 1.000 0.478 
 
* Euromonitor, Global Market Information Database   10
 
Table 3 
CD prices: Ordinary least squares regressions with country fixed effects  
 
 
 (a) 
No lag 
(b) 
Legal lag 
(c) 
Legal lag;  
year trend 
(d) 
Legal lag;  
year 
dummies 
Constant 17.1*** 
1.29 
17.3*** 
1.26 
16.9*** 
1.22 
17.9*** 
1.45 
Income 0.157 
0.126 
 
0.156 
0.122 
 
0.373*** 
0.145 
 
0.301* 
0.172 
 
CD Player 
ownership 
-4.01 
2.65 
 
-4.65* 
2.57 
 
0.434 
0.319 
-0.00545 
3.26 
Exchange 
rate 
8.61*** 
3.06 
 
8.55*** 
2.95 
 
4.58 
3.24 
 
3.07 
3.32 
 
Legal -0.439 
0.446 
    
Legal 
(lagged) 
 -0.944** 
0.418 
-0.856** 
0.403 
-0.879** 
0.421 
Year     -0.300*** 
0.119 
 
No. of 
observations 
 
84 
 
84 
 
84 
 
84 
Adjusted R
2 0.922  0.926  0.931  0.933 
F-statistic 66.04  70.28  71.53 55.97 
 

A Contractual Approach to the Gray Market”,

Copyright, parallel imports and national welfare: The Australian market for sound recordings”,

Industry, Ltd, Supplementary memorandum to House of

International Comparisons of Pricing-to-Market Behavior”,

International Federation of the Phonographic Industry (IFPI), Letter to Legislative Council, Hong Kong,

Mergers Commission (MMC), The Supply of Recorded Music,

Research Associates (NERA), The Economic Consequences of the Choice of a Regime of Exhaustion in

the Commonwealth of Australia, Copyright Amendment Bill (No.2): Explanatory Memorandum,

Parallel Imports and Music CD Prices

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Parallel Imports and Music CD Prices

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