International Gray Markets

Reference: Prince, Melvin and Davies, Mark. “Seeing Red Over International Gray Markets”, Business Horizons, March-April 2000. pp. 71-74.

Summary/Description:

International gray markets pose a real threat to manufacturers and their licensed retailers and they also represent a legit market that is just trying to get the end consumer the best quality product at the lowest price. It’s all a matter of who you’re talking to. An international gray market is an unlicensed or unplanned channel member who competes with licensed sellers of imported products. The gray market, however, can usually sell the import at a lower price than the licensed retailer. The US courts have ruled that manufacturers can eliminate the problem of confusion of whether or not the product is licensed. This dispute is a very complicated legal problem in the United States. One way that manufacturers can combat the problem is by obtaining an exclusion order from U.S. Customs when an unauthorized source tries to sell their product. This has been made difficult by the European Union revoking border inspections and non-tariff barriers which allows identical products to be shipped to these unlicensed retailers. The other side of the story from the gray markets is that they are simply “engaging in legal and ethical activities under the free enterprise system”. They also claim the manufacturers to be hypocrites when the manufacturers sell off excess inventories to the gray markets in an effort to improve cash flows. Who is right? Who is wrong? Here are a few recent cases involving gray markets.

Main Points

1. The cigarette industry has felt the most hurt from the problem of gray markets recently. Cigarette distributors claim that manufacturers aren’t concerned with this problem because with smokers who are hard out for money can get cheaper cigarettes through the gray markets. States are also concerned with gray markets because of the recent court decision awarding 206 billion dollars to states based on the quantity of cigarettes sold in each state. Gray market sales are not included in this count. They are also concerned because it cuts down on their tax revenue when cigarette sales go untaxed through gray markets. States also fear that cheaper cigarettes will attract more under-aged smokers, an issue that states are trying to improve upon. Although legislation to ban the sale of gray market cigarettes will go into effect this year, the larger manufacturers fear it will be good in writing but difficult to enforce.

2. Apple Computers, Inc. is feeling the effects of gray markets. Apple has spent a lot of time and resources in an effort to improve the name reputation of the Mac computer. Their main focus in this effort is to supply superior service and instruction on how to use the Mac. Gray marketers are not concerned with this. Customers buying Macs from gray markets often complain about the service provided post-purchase but authorized dealers have been given rave reviews. One way Apple has chosen to fight the problem is by refusing to sell Apple products to authorized dealers if they