The impact of intellectual property rights protection on trade: The role of a “third country” in market power and market expansion effects

•This study develops the ‘three-country model’ for analyzing the impact of intellectual property rights (IPRs) on international trade.•Our ‘three-country model’ provides new insights into the impact of IPRs on trade flows, especially in the context of increased competition.•The appearance of a ‘third country’ restrains market power effects and stimulates market expansion effects.•Export elasticity of IPRs protection is the highest in case of primary products and lowest in the case of technology-intensive and human capital-intensive products. This study analyzes the impact of increased protection of intellectual property rights (IPRs) in importing countries on the inventing countries’ exports in the presence of “third countries.” In this study, “third countries” include all countries that compete with the inventing countries in exporting similar products to the importing countries. The most significant contribution of this study is to develop an alternative empirical approach for analyzing the impact of IPRs on trade flows. This approach considers three players (the inventing/exporting country, the importing country, and “third countries”) and thus is tentatively called the “three-country model.” The findings confirm that our “three-country model” provides important insights into the impact of IPR protection on international trade, especially in the context of increasingly fierce competition in international trade. We found that the emergence of a third country restrains the market power effects and stimulates market expansion effects. Specifically, when a third country appears, the increased protection of IPRs in the importing countries encourages the inventing countries to increase their exports. However, the export elasticity of IPR protection is highest for primary products and lowest for technology-intensive and human capital–intensive products.