Coping with Gray Markets: The Impact of Market Conditions and Product Characteristics

39 Pages Posted: 31 Oct 2011

See all articles by Foaad Iravani

Foaad Iravani

University of California, Los Angeles (UCLA) - Anderson School of Management

Hamed Mamani

University of Washington - Michael G. Foster School of Business

Reza Ahmadi

University of California, Los Angeles (UCLA) - Anderson School of Management

Date Written: October 1, 2011

Abstract

Gray markets, also known as parallel imports, are marketplaces for trading genuine products that are diverted from authorized distribution channels. They have created fierce competition for manufacturers in many industries and each year billions of dollars worth of products are traded in these markets. Using a game-theoretic model, we analyze the impact of parallel importation on a price-setting manufacturer that serves two markets with uncertain demand. We characterize the optimal joint price and quantity decisions of the manufacturer which determine whether the manufacturer should ignore, block, or allow parallel importation. We also show that parallel importation forces the manufacturer to reduce her price gap while demand uncertainty forces her to lower prices in both markets. Moreover, we observe that parallel importation may force the manufacturer to exit the low-profit market. Through extensive numerical experiments, we explore the impact of market conditions (size and price elasticity) and product characteristics (a fashion item or a commodity) on the manufacturer's reaction to parallel importation. In addition, we provide interesting insights about the value of strategic pricing for coping with gray markets versus the uniform pricing policy that has been adopted by some companies to eliminate gray markets.

Keywords: Gray markets, parallel importation, parallel markets, demand uncertainty, strategic pricing, uniform pricing, commodity product, fashion product

JEL Classification: L10

Suggested Citation

Iravani, Foaad and Mamani, Hamed and Ahmadi, Reza, Coping with Gray Markets: The Impact of Market Conditions and Product Characteristics (October 1, 2011). Available at SSRN: https://ssrn.com/abstract=1952003 or http://dx.doi.org/10.2139/ssrn.1952003

Foaad Iravani (Contact Author)

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Hamed Mamani

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States

Reza Ahmadi

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

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