Academic journal article Atlantic Economic Journal

Gray Marketing: Does It Hurt the Manufacturers?

Academic journal article Atlantic Economic Journal

Gray Marketing: Does It Hurt the Manufacturers?

Article excerpt

Introduction

Parallel importing has attracted increasing interest in the international practice, and concern to manufacturers and retailers since the mid-1980s (Mitchell 1998; Eagle et al. 2003). In the case of Silhouette in July 1998, the European Court of Justice (ECJ) arrived at a judgment that relaxed the definitions of cartels, price controls, and market manipulation. With the support of the European Commission and many EU governments, the court has effectively limited gray imports into the EU market (The Economist 1998). The so-called parallel importation or gray marketing arises when a marketer imports branded products from abroad, then diverts and sells them through unauthorized channels (Inman 1993). Gray markets are not generally considered illegal, in contrast to the black market of stolen or counterfeit goods. Rather, gray goods are genuine in terms of their manufacturer, but their distribution is unauthorized. Only when the gray goods violate either the product regulations or the licensing contract of the trademark owner, gray-marketed goods are illegal (Palmeter and Remington 1988). In the paper, parallel importing and gray marketing are used interchangeably and indicate the same meaning.

Although there is no official data on the size of international gray markets, parallel importation is generally considered a significant phenomenon (Chen and Maskus 2005). The estimated market size of international gray goods range from $7 billion to $10 billion U.S. dollars (Mathur 1995; Eagle et al. 2003). According to the estimates of National Economics Research Association (NERA), parallel imports account for between 5% and 20% of trade within the EU for such goods as consumer electronics, cosmetics and perfumes, musical recordings, and soft drinks (NERA 1999). Some IT companies, including 3Com, Apple and HE established a so-called 'Anti-Gray Market Alliance' in order to lobby against the importation of gray market goods in September 2001. They argued that the prevalence of gray goods has substantially reduced their profits. Recently, Levi's retailers resorted to law to restrain the largest retailing store Tesco to sell Levi's jeans, because Tesco imports the jeans from other markets and sells them in the UK market at a low price. However, in order to compete with the gray goods, Levi's announced in late April of 2003, that its Signature Series was to be sold in some discount stores such as Wal-Mart. (Voyle 2003). In sum, there is evidence of tension between attempts to open parallel imports and attempts to protect trademark owners from its impact (Mitchell 1998).

As gray goods are not counterfeit goods, the question of whether the importation of gray goods with genuine trademarks should be restricted has raised fierce debate. As mentioned earlier, the decision by the ECJ was ruled upon the request of some trademark owners including product manufacturers and their authorized retailers. Their arguments are summarized as follows: First, the manufacturers stated that they have the fight to determine channel structures for their products and subsequently to ban the imports of gray goods into the EU. Second, gray marketers often maintain significantly higher gross profit margins simply because they not only take away the market share of authorized retailers, but also free-ride on the marketing communications performed and customer services provided by their authorized counterparts. Therefore the sales through gray channels will likely hurt authorized channels. Some works have been done in solving these problems. For example, Gallini and Hollis (1999) employed a contractual structure model to harmonize the benefits between authorized retailers and gray marketers. Third, since the prices of gray goods are usually lower than their authorized counterparts, this may hurt not only the existing consumers but also potential consumers due to a lower level of service by authorized retailers and lower investments made by manufacturers in product improvement and advertisement. …

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