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Profitable gray market with asymmetric costs

Author

Listed:
  • Qing Hu

    (Kushiro Public University of Economics)

  • Tomomichi Mizuno

    (Graduate School of Economics, Kobe University)

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 market, which contradicts to the conventional result. It happens when the marginal production cost in the high-priced market is sufficiently large (or the transaction cost for the gray marketer is sufficiently small in the linear demand case).

Suggested Citation

  • Qing Hu & Tomomichi Mizuno, 2023. "Profitable gray market with asymmetric costs," Discussion Papers 2319, Graduate School of Economics, Kobe University.
    • Handle: RePEc:koe:wpaper:2319
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