Cross-market selling channel strategies in an international luxury brand's supply chain with gray markets

When a luxury brand manufacturer sells its product in two separate markets with price discrimination, it may face gray marketers, who purchase the product in the lower-price market and resell it in the higher-price market. To mitigate the effects of the gray market, a luxury brand manufacturer may strategically select its sales channels to sell the product in both markets simultaneously, in both markets sequentially, or exclusively in the high price market. We derive the equilibria for each strategy, and demonstrate that selling strategy can mitigate the negative the impact of gray market. The results further show that gray market is active only if the customer’s valuation discount for gray products is moderate and the gap between the customer’s perceived status valuation of the two markets is relatively large. As compared to the case without the gray market, we find an interesting and counter-intuitive result, that gray market activity can mitigate the double marginalization effect and lead to a Pareto improvement for both the manufacturer and its retailer. Our research enriches the literature on gray markets by offering new insights and implications, and our results provide international luxury brand manufacturers with guidelines for efficiently managing cross-market sales channels.