The Impact of Gray Markets on Product Quality and Profitability
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RESEARCH ARTICLE
The Impact of Gray Markets on Product Quality and Profitability Xueying Liu 1 & Amit Pazgal 1
# Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract Gray markets, the selling of genuine products via unauthorized channels, have grown in importance for both manufacturers and retailers and have thus been studied extensively since the 1980s. Recently, consumers have shown a greater willingness to patronize unauthorized retailers for different foreign products (electronics, clothes, cosmetics, and so on). Increasing consumers’ demand for gray market products has influenced both manufacturing and marketing decisions. This paper investigates the impact of gray markets on manufacturers’ and retailers’ profits and the quality of the offered products. We show that when the manufacturer sells directly to consumers, gray markets have a negative effect on both price and quality of products as well as manufacturer profits. However, when the manufacturer sells through a distribution channel, the quality of the offered products and the manufacturer’s and retailers’ profits can all increase regardless of the source of the gray market goods. Our study further shows, as expected, that gray markets always increase the total consumer surplus. Keywords Gray markets . Product quality . Channel structure . Pricing
1 Introduction Gray markets, also known as markets with parallel imports, are marketplaces where genuinely branded merchandise is sold through both an authorized channel by the trademark holder and an unauthorized one. Unauthorized channels are created by retailers or other commercial entities buying the goods from authorized distributors in one market (usually for a low price) and importing the goods to a different market where they can sell them at a higher price. Products sold via gray markets are easily found in daily shopping, and their presence may even go unnoticed by most consumers. Bucklin [1] documents that, for certain brands of
Electronic supplementary material The online version of this article (https://doi.org/10.1007/s40547-020-00105-6) contains supplementary material, which is available to authorized users. * Xueying Liu [email protected] Amit Pazgal [email protected] 1
Jones Graduate School of Business, Rice University, Office 412, 334 McNair Hall, Houston, TX, USA
watches and fine products, market shares for gray goods were as high as 40%. Furthermore, in 2010–2011, iPhone 4 and iPad 2 were initially sold only in the USA and the European Union. Gray marketers bought the devices and sold them in other countries where Apple had not yet launched them, and consumers tended to treat them as authorized purchases [2]. Gray markets significantly impact online shopping as well. Alibaba, China’s most extensive shopping site, has 300 million online shoppers and offers a significant number of gray market goods. This practice is so prevalent and successful that it attracted the official authorized brand channels to launch and link their sites to Alibaba’s TaoBao.com mall [3].
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