Profitable gray market with asymmetric costs

ABSTRACT

When manufacturers sell their branded goods at different prices in different markets or channels, gray marketers buy goods in the low-priced market and resell them in the high-priced market to compete with the manufacturers’ authorized sellers. Conventional wisdom suggests the lost sales in the high-priced market resulting from the gray market’s diversion always make manufacturers worse off. However, by purely considering the marginal production cost in the high-priced market is higher than the low-priced market, we show that the manufacturer can gain from gray markets, which contradicts to the conventional result. It happens when the production is significantly less efficient in the high-priced market than in the low-priced market.

KEYWORDS:

• Gray market
• parallel trade
• cost asymmetry
• oligopoly

JEL CLASSIFICATION:

• F12
• F23
• L13

Acknowledgements

The second author gratefully acknowledges the financial support of the Japan Society for the Promotion of Science (JSPS), KAKENHI Grant Numbers JP22H00043 and JP23H00764. The usual disclaimer applies.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ We also examined all the results by considering $\mathit{F}=1$, and obtained the similar main results. For the economy of space, we omit the derivations. Hence, it is shown that only cost asymmetry across the two countries is needed for our result. To emphasize that the foreign price must be lower than the domestic price so that the gray market could exist as Mukherjee and Zhao (2012) and Autrey et al. (2015), we maintain $\mathit{F}<1$ in our model.

Additional information

Funding

The work was supported by the Japan Society for the Promotion of Science (JSPS), KAKENHI Grant Numbers JP22H00043 and JP23H00764.