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Profitable gray market with asymmetric costs

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  • Qing Hu
  • Tomomichi Mizuno

Abstract

When manufacturers sell their branded goods at different prices in different markets or channels, gray marketers buy goods in the low-priced market and resell them in the high-priced market to compete with the manufacturers’ authorized sellers. Conventional wisdom suggests the lost sales in the high-priced market resulting from the gray market’s diversion always make manufacturers worse off. However, by purely considering the marginal production cost in the high-priced market is higher than the low-priced market, we show that the manufacturer can gain from gray markets, which contradicts to the conventional result. It happens when the production is significantly less efficient in the high-priced market than in the low-priced market.

Suggested Citation

  • Qing Hu & Tomomichi Mizuno, 2025. "Profitable gray market with asymmetric costs," Applied Economics Letters, Taylor & Francis Journals, vol. 32(16), pages 2375-2379, September.
    • Handle: RePEc:taf:apeclt:v:32:y:2025:i:16:p:2375-2379
    DOI: 10.1080/13504851.2024.2332590
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