Gray Market

Grey market (also sometimes known as “gray market”) involves the trade of legal goods through unauthorized, unofficial, and unintended channels of distribution. Hence, trademarked products are often exported from one country to another and sold by unauthorized individuals or firms. This practice is also often known as parallel importing, product diverting, and even arbitrage, and typically flourishes when a product is in short supply, when manufacturers resort to skimming strategies in specific markets, or when the products are subject to substantial markups. For example, even as Apple, Inc., rolled out its latest third-generation iPhone on July 11, 2008, several retail stores throughout the world, including those in China and Thailand, continued to take orders even though this product was not being sold in those markets. Their computer codes were unlocked, so that the phones could be used with different mobile service providers.

Even in India, one of the fastest-growing markets for cell phones, Apple delayed the release of the original iPhone until mid-2008, a year after the release in the United States and six months after its release in Europe, for fear of grey market sales. A wide range of goods and services have been sold through grey markets, including automobiles, broadcasting delivery, college textbooks, pharmaceuticals, photographic equipment, video games, and even wines. Research has demonstrated that every one of the world’s eight major export regions has experienced grey marketing activity damaging to their operations. One trade group, the Anti-Grey Market Alliance, in conjunction with a study with the consulting firm KPMG, estimated the global grey market for information technology (IT) products to be over $40 billion. In the United States, grey market goods are prohibited according to Section 526 of the Tariff Act of 1930, which expressly forbids importation of goods of foreign manufacture without permission of the trademark owner.

However, the implementation of regulation by the U.S. Customs Service and the courts’ interpretation of the law have not been in line with each other. In a recent study, about 13 percent of the firms in North America have reported some form of grey marketing. A positive outcome of grey markets is that they form an arbitrage that forces prices down and provides brand-name goods at lower prices to the customer. They can create incremental sales in markets not in direct competition with sanctioned dealers, and sometimes help companies overcome distribution bottlenecks because of local government regulations. Occasionally, it is less expensive to tolerate grey marketing than to shut down the operations completely because of the time and resources required to monitor the violations. Finally, uncovering grey marketing activities can provide a firm with sound marketing intelligence regarding customers in these markets and their buying behavior.

On the other hand, the phenomenon obviously also has several drawbacks for companies. It simultaneously undermines the manufacturer’s distribution arrangements and their ability to control quality-it creates the dilution of exclusivity and damages existing channel relationships. Official dealers may not choose to offer significant services in order to compete with the grey market price for the product. There is likely to be an erosion of the brand’s global image, and the firm is unlikely to have the ability to use traditional pricing strategies, thus having less control over their overall marketing strategies. In order to reduce the impact of grey market goods, firms can take pragmatic strategies to evaluate quantity- discount schedules, reduce price differentials between markets and keep them lower than the costs of shipping and inventory holding costs, differentiate products sold to different markets, and sell unique products and names in each market.

They can also leverage the Web and Internet technologies to facilitate surveillance of the names and locations of grey marketers. On the demand side, customers can be made aware of the risks of buying goods sold in these markets, refused warranties for the products purchased through these markets, and offered attractive rebates on authorized and legal goods to compensate for the price differentials between those sold through legitimate channels versus those that are not.