Pricing in Multi-markets with the existence of a Grey Market: An Analytical Model and Longitudinal Analyses

Description

The sale of genuine branded products through unauthorized channels (also known as gray market) is a growing problem for many firms that operate in multiple markets. Though it is hard to measure the exact size of grey market, it is generally believed that the existence of such unauthorized sales will cannibalize the profits of brand owners and measures need to be developed to counter the gray market threat. In this paper, we develop a pricing model where a firm tacitly coordinates prices across different channels so as to maximize total profits. We demonstrate that while a firm needs to reduce the price gap between markets thus leaving little room for arbitrage, the firm can sometimes benefit from the emergence of gray market activities. We also propose methods to empirically measure and examine grey markets, using two data sets: one from a multiproduct, multi-channel and multi-nation company, and one from one of the biggest online market place in China where some of the “grey market” products are sold.