Grey Market, also called “parallel imports”, is characterized by the marketing of authentic products through distribution channels, physical or digital, not made official by the companies. In practice, companies establish contracts with certain distributors in order to export their products to specific markets. However, there is the possibility that these products may be resold, by entities not authorized by the producer, to destinations where the company has an official presence, as well as to destinations where it does not enjoy this feature (Hlavnicka, Keats 2021, p.23).
Problems of Grey Market
In order for this phenomenon to be perceptible to everyone, it is necessary to investigate the various problems that affect the following parties involved: producer, distributor and consumer.
- The Grey Market favours the development of the counterfeit market insofar as, with easier access to official products, the production of replicas becomes increasingly frequent, infringing the exclusive rights of the brand.
- Most consumers are unable to verify the authenticity of products, which proves to be a major concern for them, since, if the product is counterfeited, it could be harmful to their well-being. As a result, an environment of uncertainty and dissatisfaction is created, compromising the quality of companies' official distribution channels (Alberts 1992) and their sales.
- In addition, companies that tend to devalue the Grey Market problem may have negative consequences due to the fact that unauthorized distributors may charge a price different from that practiced by companies (usually lower), negatively affecting the profit margins of the authorized distributors.
- As a result of this unethical practice, companies find it difficult to account for and anticipate data on current and future demand for a particular product. In this way, this scenario may lead to a shortage or excess of inventory.
How to combat the Grey Market?
In this way, it is crucial for companies to implement strategies that prevent the advancement of the Grey Market.
- Thus, companies must control, in a more rigorous way, their distribution channel to prevent the entry of unauthorized distributors, through the implementation of software that allows associating a digital ID to each product, containing information regarding its destination and their official distributor. With this, the company can inspect the entire route of the product and understand whether or not it is in the intended market, being able to act effectively in the fight against the Grey Market.
- In addition, companies can choose to create different product names and packaging, depending on the market in which they operate, allowing this market not to be recognized in different markets, thus not having incentives to purchase products sold there.
- Another solution would be for companies to equalize, worldwide, the price of products to eliminate the sales incentive on the part of unauthorized distributors, since they would have to practice a lower price than the one marketed globally, thus being harmed.
- According to Hongfu Huang, Yong He and Jing Che (2018), the company can protect itself from the Grey Market by reducing the quality of its product in order to be able to charge a lower price and, thus, discourage resale by unofficial distributors.
- Finally, and in opposition to the previous strategy, companies can claim that their products are priced higher because of higher quality.
Grey Market Conclusion
In conclusion, despite the implementation of all the strategies mentioned above, the Grey Market will never be eliminated in its entirety, since there will constantly be the purchase and sale of securities and products that have not yet been officially authorized by the companies. In addition, they entail greater costs to combat this problem, making many of them prefer to continue selling their product to official distributors regardless of their final destination.
- Alberts, S.J. (1992). Trademarks and gray market goods: Why US trademark holders should be held strictly liable for defective gray market imports. The George Washington Journal of International Law & Economics, 25(3), 841–873.
- Hlavnicka, P., Keats, A. (2021). Protecting the Brand, Volume 1: Counterfeiting and Grey Markets. Business Expert Press, LLC.
- Huang, H., He, Y., & Chen, J. (2018). Competitive strategies and quality to counter parallel importation in global market. The International Journal of Management Science.
Author: Ana Inês Jorge Gonçalves, Inês Espregueira Guerra Teixeira de Morais, Marta Gomes Ribeiro