Thesis statement and introduction
The rise of the gray market is a major crisis affecting almost every legally registered and distributed commodity. For instance, in North America gray markets exceed ten billion US dollars annually. The growth rate of this market is about 23% annually, and it is projected to shoot as the exportation of goods and services is increasing tremendously each year, having a profound effect on the global trade patterns (Cliquet, 2013).
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This paper looks into the factors that promote grey market development, as well as the stakeholders involved in the process. It also evaluates the differences among gray markets and authorized distribution channels. Also, the paper establishes the impact of gray goods on authorized distributors, customers, manufacturers, gray market arbitrage, and the country. In the end, the paper provides recommendations and tactics to curb gray markets and their impact.
What is the gray market?
The gray market is the supply of commodities through illegal channels. The goods imported are genuine and legally accepted. However, they have vague importation channels and lack the native trademark holder’s permission. So, the problem of the grey market consists not in the quality of goods but the legality of the importation process, which in turn, brings about a poor business environment (Cliquet, 2013).
The legally registered and authorized distributors face competition from the unauthorized distributors against their trademarked commodities. As a result, the total sales of a business may depreciate because the authorized distributor may not have an incentive to promote their products.
The Platform for the development of gray markets
Gray markets are increasing over time. Their existence may be attributed to a variety of circumstances. There are three primary preconditions for the development of gray markets.
An abundant source of supply
There must be a source of goods for the gray marketers for parallel importation of goods to succeed. With the availability of adequate sources of commodities, gray markets may thrive, and expand as well. To increase sales and make profits, the authorized distributors may sell products to anyone interested, without excluding the gray market distributors. Consequently, they set the pace for encroaching of the gray market phenomenon (Masaaki Kotabe, 2009).
Poor trade control policies and barriers
With poor international trade control measures and policies, gray markets increase substantially because transactions among different countries are easy to conduct due to low barriers. Trade policies may not only be poor but also non-existent, allowing parallel importation of products and the evolution of gray markets. The European Union regulations and policies may not provide them.
Product Price differences in different countries
Transaction and transportation costs have a profound effect on price differentials. As a result, they play a critical role in determining an enterprise’s pricing strategy and hence lead to the evolution of gray markets. For example, the transportation of automobiles is very expensive. This may encourage distributors to use illegal distribution channels to evade the high exportation and importation costs incurred (Cliquet, 2013).
Who is involved in the gray market?
Parallel importation of commodities is an organized joint effort, which involves either authorized distributors dealing with unauthorized manufacturers or agents who obtain commodities from legal dealers. The gray market practice may also be due to unauthorized distributors who do not want to follow the right procedures of importation, exportation, and business in general. For example, some pharmaceutical products are present in the market due to parallel importation. This results in the exploitation of consumers and competition for the existing authorized distributors.
The impact of gray goods
To the authorized distributor
Gray markets generate a very unhealthy business environment. As a result, the authorized distributors may be demotivated and deprived of the incentive to promote their commodities. Consequently, the company’s sales may depreciate, leading to losses and even bankruptcy of the business. Paradoxically, they compete for their goods in the domestic market (Masaaki Kotabe, 2009).
To the consumer
Gray goods sideline and disrespect the goodwill of the consumers. The end users may occasionally be disappointed by the supply of quality compromised products (safety protection, warrant provision, and service-wise). These are the goods they buy without prior knowledge of them, lacking the distributor’s authorization. For example, in 1984 the IBM Company encountered the problem of gray marketers. This accounted for about 10% of the company’s total sales. These marketers were large-scale buyers who received high discounts from the company and resold the machines to unauthorized distributors. Consequently, the customers received computers without genuine warrants and, hence, they were deprived of warrant services from the original company (Masaaki Kotabe, 2009).
To the manufacturer
Gray goods are sold to dealers and consumers against the manufacturer’s will that is, to unintended distributors. This undermines the producer’s packaging, pricing, distributing, and promotion strategies. These goods are usually sold at lower prices beyond the will of the manufacturer. Apart from affecting the company’s profit margins, gray goods may also affect the manufacturer’s global reputation. This will hence affect its global business portfolio.
Effect on the importing country
Gray goods may affect the economy of the country because goods do not follow the right distribution channels. For example, if the government is involved in the importation of a certain product, any other illegal channel of distribution may hamper the state from making profits. This may also affect the country’s reputation, keeping off interested investors. (Cliquet, 2013)
To the gray markers arbitragers
These are the stakeholders who seem to benefit a lot from this kind of business. They make a lot of profits from the goods sold. They identify the market, look for the products, and supply them accordingly.
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Global strategies promote the evolution of the gray markets because the existing policies and trade strategies may largely contribute to it. Strategies, such as ceasing trading between different countries and poor regulations may promote the development of gray markets. For instance, China trades with many countries globally. As a result, some countries especially developing nations have fallen victim to gray markets. In most cases, it is due to their low prices and the availability of commodities (Masaaki Kotabe, 2009).
In conclusion, gray markets are hazardous to a normal and healthy business environment. It causes unhealthy competition between authorized and unauthorized distributors. This results in low profits and a bad reputation. Hence, it calls for the implementation of policies and regulations to help curb this act. Strict and closely observed importation procedures should be set up to ensure legal trade. To discourage illegal dealers, every nation should enforce high penalties for any gray marketers found in the business. This may involve life imprisonment for impersonation and infringe on the IP (Intellectual Property) of the manufacturers. With these and more strategies in place, it may be possible to reduce the evolution of the gray markets and their impact on humanity. This will, consequently, provide a healthy business environment.
Cliquet, G. (2013). Geomarketing: Methods and Strategies in Spatial Marketing. Hoboken, New Jersey: John Wiley & Sons.
Masaaki Kotabe, K. H. (2009). The SAGE Handbook of International Marketing. New York: SAGE.