Confronting the gray market problem. (2024)

Gray markets involve the sales of legitimate products by way ofchannels of distribution that are not authorized by the brand owners.Gray markets may benefit consumers and even brand owners under certaincirc*mstances. On balance, however, gray markets are detrimental tobrand owners because gray market traders access genuine product in bothphysical and virtual markets and reap profits stemming from the resaleof goods owing to price differentiation between markets, thus deprivingbrand owners of those profits. In this study, we discuss the principalfactors that encourage a gray market and the legal underpinnings thatpermit gray markets in the United States. We then summarize managerialtactics--both reactive and proactive--to combat gray markets.

Business Economics (2014) 49, 263-270.

doi:10.1057/be.2014.29

Keywords: gray market, parallel trade, trade diversion

Agray market, as the term will be used in this paper, is the tradeof goods or services through distribution channels that are legal butunofficial, unauthorized, or unintended by the original provider.'Gray markets are not counterfeits--the products are legitimate andinvolve the sales of trademarked products by way of channels ofdistribution that are not authorized by the brand holders [Duhan andSheffet 1988]. The International Trademark Association [INTA 2014]clarifies this distinction for international trade:

The trade represents a goods arbitrage situation where a graymarketer takes advantage of price discrimination both within a domesticmarket and across country markets to make a profit from buying andreselling the genuine product [Inman 1993].

In this paper, the problem of a gray market is addressed in thecontext of a trademark owner's perspective in situations where thefirm negatively reacts to the trade and limits the distribution of itsgoods through unauthorized channels. At first glance, one could questionwhether the gray market is really a problem for the firm as the tradeinvolves legitimate product--the firm is still selling its goods. Infact, the parallel trader may actually be opening untapped markets forthe firm. Thus, we must first acknowledge conditions where a gray marketmay be beneficial for the company and/or the consumer. The focus of thepaper, however, is on the effects on brand owners.

1 . Beneficial Effects of Gray Markets for Brand Owners

The gray market can boost incremental sales of the firm, such asserving markets not in direct competition with its authorized dealers,providing access to products in a market with supply shortages, andallowing firms to assess market segmentation information [Anita andothers 2004; Xiao, Palckar, and Liu 2011]. The resale of luxury carsfrom the United States to China has provided a lucrative goods arbitragesituation for gray marketers like Automotive Consultants of Hollywood toserve the insatiable demand of Chinese consumers for Mercedes, BMW, andRange Rover vehicles [Goldstein 2014]. In 2009, Unilever faced a graymarket situation in Jordan, Syria, and Lebanon--an estimated $4 millionin unauthorized sales in this region. The firm decided to launch itsClear shampoo with media on the pan-Arab satellite networks to build abrand awareness of this new product in the region--even in markets likeJordan that were not part of the company's official channel ofdistribution. The managers at Unilever used the gray market sales ofClear to actually better understand the market, such as where theproduct was sold and the type of consumer purchasing the shampoo inorder to officially launch the product one year later in Jordan [Mahajan2012, p. 20].

The gray market can stimulate competition and benefit theconsumer--the purchaser receives a lower-priced good and this benefitsconsumer welfare [Nolan-Haley 1983, p. 233]. In 2013, Pompei, awell-known gray marketer in the Hong Kong retail market, started sellingits product online through Alibaba's TMall (formerly Taobao Mall),a Chinese-language website [http://www.tmall.comf]. Pompei ChairmanVincent Wong reported that their virtual sales of gray goods haveincreased around 20 percent each month at the TMall site [Chiu and Chu2014]. Another gray marketer, Zhenpin.com, sources from distributors inEurope, such as Prada and Gucci, and resells the product in China at a10-20 percent discount less than authorized retailers in China [Chiu andChu 20141.

2. Adverse Effects of Gray Markets on Brand Owners

From a brand owners' perspective, adverse situations stemmingfrom a gray market include problems related to upholding their brandreputation with consumers and maintaining a sound relationship with thefirm's authorized distribution channel. For example, brand dilutioncan be a problem if the gray market resellers cannot provide after-salesservice, warranty support, and/or replacement parts [Nakra 2006]. JohnDeere, at its company website, warns potential consumers of a graymarket or "migrated" machine that, "Product warranty istied to the specific region where a machine was originally marketed, anddoes not follow the unit if it migrates from one area to another- [JohnDeere n.d.] Nikon, the Japanese camera manufacturer, used its"Peace of Mind" campaign targeted at consumers to stress thevalue of buying through a legitimate supply chain and even rewarded itsconsumers with an extended warranty for this type of compliance [Simpson2012].

In addition to problems stemming from inability to support productssold in gray markets, another problem stems from the type of productinformation (repackaging) that occurs in the resale of the good, whichcan affect the consumers' perception of the branded product[Chaudhry and Walsh 1995]. Pharmaceutical firms have consistentlyquestioned the legality of the poor quality presentation of repackagedgray market drugs sold in the European Union [Bird and Chaudhry 2010].

Finally, brand owners may seek to enhance profits by pricediscrimination between different markets where they control distributionchannels. The arbitrage function of gray markets may thus have a direct,adverse impact on their earnings.

3. Confronting the Gray Market Problem for Brand Owners

The Alliance for Gray Market and Counterfeit Abatement (AGMA)claims that high-tech companies can lose approximately $1.4 billion inprofits each year owing to gray markets [AGMA and Deloitte 20111 Themarket fragmentation of the pharmaceutical market in Europe owing tovery distinct national drug pricing schemes continues to create alucrative market for gray marketers to "buy low--sell high"owing to distinct nationally regulated prices. Other illustrations ofprice discrepancies are widely reported in studies on the gray marketfor information technology products. For example, Gudigantala and Bicen[2011] report that authorized sellers lose billions of dollars to graymarketers involved in selling software, toner cartridges, processors,computer equipment, and network equipment.

The European Federation of Pharmaceutical Industries andAssociations [2013] continues to warn that the gray market erodes thepharmaceutical firms of their innovation reward and depletes funding forfuture research and development. It estimates the value of the graymarket in Europe at [euro]5,000 million (ex-factory prices).

There are gray markets in all sectors ranging from tangibleproducts (electronic components, heavy construction machinery) tointangibles (broadcast signals): and from ordinary consumer products(shampoo, light bulbs) to critical health care goods (pharmaceuticals,pacemakers). The three main contributions advanced of this paperinvolve: (1) a discussion of principal factors that encourage a graymarket; (2) a brief overview of the legal implications of gray markets;and (3) a brief discussion of an array of managerial tactics; bothreactive and proactive, to combat gray markets.

4. Conditions for the Existence of Gray Markets

Overall, gray markets evolve with three underlying conditions: thegray marketers must be able to access goods in the distribution channel,the barriers to trade between country markets must be low enough toallow the traders to easily move products: and the price variation mustbe high enough to provide a profit incentive [Duhan and Sheffet 198811.Figure 1 illustrates the types of trade diversion that occurs via a graymarket [Assmus and Wiese 1995]. Assmus and Wiese define the three typesof gray markets in foreign trade illustrated in Figure 1 as follows:

1. Parallel Importation. If a product is priced lower in the homemarket than in the foreign market, and if the cost of arbitrage is lessthan the price difference, a gray marketer can take advantage of theprice difference by parallel importation from the country of productionto the export market.

2. Reimportation. If a product in the foreign market is cheaperthan in the home market, and if the cost of arbitrage is less than theprice difference, then reimportation from the foreign market isprofitable for a gray marketer.

3. Lateral Importation. If there are price differences between twocountries, and the product is not produced in either one, the productimported by one country is exported to the other through unauthorizedchannels.

AGMA [2014] reports that the most common sources of gray marketactivity result from the following situations in distribution channels:

1. Overdiscounted buys: Partners or customers purchase a largenumber of products when in fact they need a smaller quantity of productsin order to achieve volume discounts. They then resell the extraproducts without the consent of the vendor.

2. Differences in purchasing power: Products sold in developingmarkets are often sold at lower price levels owing to low purchasingpower on the part of buyers. These are often sold to brokers who importthem back to developed markets in North America and Europe and competeagainst authorized distributors--often successfully owing to lowerprices.

3. Abuse of marketing offers: Software licenses or other productsare sometimes provided at higher discount or no chargeas-try-and-buy" in developing markets or for institutionalcustomers. These may be activated or sold elsewhere without theknowledge or consent of the OEM (original equipment manufacturer).

4. intervention in legitimate supply chain: Some products destinedfor export via logistics providers never reach the intended destination.

5. Secondary markets to sell off stock: The inventory of excess,aged, or manufacturer-discontinued products may be sold by OEMs ordistributors on the open market (usually as a lower product class--takeas is, no return, no support--and equally discounted). These are oftensold as new on gray markets to unsuspecting customers.

5. Nonlegal Factors that Stimulate a Gray Market

There are four primary factors: price differentials, market access,volume of demand, and legal status of gray markets that firms andpolicymakers can use to assess the emergence of gray markets. We discussthe first three factors below, but separate our discussion of legalfactors in the next section.

Price differentials

The major reasons for price differentials are changes in theexchange rate, competitive pricing strategies of the firm, pricediscrimination, and regulated prices [Chaudhry and Walsh 1995]. Acursory review of foreign exchange rate movements for the past two yearsof the U.S. dollar vs. the U.K. pound, Euro, Swiss franc, Canadiandollar, and Japanese Yen illustrates the price discrepancies stemmingfrom exchange rate movements that are necessary for a gray marketer toseek profits incentive from arbitrage. Even a minor movement in currencyexchange rates can attract gray marketers because even a relativelysmall difference in price can result in significant profits incentivethrough a high volume of goods sold [Bird and Chaudhry 2010].

The second major area related to price differentials is marketsegmentation strategies that result in price discrimination either amongor within markets. CNNMoney reported that the reason U.S. consumers hadto wait in long queues to obtain the iPhone 5 was that Chinese consumerswere obtaining it through the gray market. This reason was a pricedifferential of $197.75. An unlocked iPhone 5 could be obtained in NewHampshire for $649, but the consumer in Beijing (owing to an import tax)would pay $846.75 [Elmer-DeWitt 2012]. Thus, the gray marketers simplypurchased iPhones in the United States and resold them in China. Appleresponded to the gray market problem in China by opening more of its ownstores there. The firm also strictly controls the supply of the iPhonesto consumers, such as limiting the number of iPhones that can be chargedto one credit card (10 in 2012); prohibiting mass purchases of iPhoneswith gift cards; and having the Apple employees in China unseal the boxand activate the phone to lessen the resale value on the gray market.

Global brand owners have partitioned national markets by settingtheir prices according to conditions that prevail for a variety ofreasons, most simply to match the price elasticity of consumer demand inthe local market [Chang 1993]. The firm can also face a situation wheretheir domestic sales region, such as the U.S. pharmaceutical market,experiences a lucrative my market for opportunistic sellers that passthe product through the supply chain with additional price markups. Thereport, Shining Light on the Gray Market [2012], conducted for membersof the U.S. Congress, highlighted the thriving gray market inpharmaceuticals and how various entities actually resold one drug forcancer treatment, Flourouracil, for an astounding 8,471 percent markupowing to product shortages. This report showed a chain of reselling theproduct in the United States that started with PriorityHealthcare's (a Maryland pharmacy) purchase of the drug from awholesaler, McKesson Corporation, at $7 per vial. This led to a chain ofreselling the drug through five entities (Tri-Med America, MedcareHealth, DTR, International Pharmaceuticals, PRN) before reaching itsfinal end-user, Sonora Regional Medical Center in California for thefinal price of $600 per vial. The analysts who uncovered this drugshortage problem interviewed one manager at a U.S. hospital who claimedthat, "(W)e have no other choice ... We have to take care of ourpatients" in order to justify paying the significantly increasedprice.

Market access

The gray marketer must be able to purchase the product within thedistribution channel. A vertically integrated firm--a company thatcontrols the product from its manufacture, distribution, to retailoutlet and ultimate sale is less likely to experience a gray market.However, where the company is not vertically integrated, an authorizeddealer may provide market access to a gray marketer. Ironically; theauthorized dealer may be the gray marketer [Chaudhry and Walsh 1995;Bird and Chaudhry 2010]. Gray marketers are opportunistic middlemen thatseek profits outside of the distributor's assigned territory[Weigand 1991]. The primary themes related to market access include thereduction of barriers to trade and a gray marketer's ability toaccess the distribution channel. The industry report, Effective ChannelManagement is Critical in Combating the Gray Market and IncreasingTechnology Companies Bottom Line, describes the situation [KPMG 2008, p.10]:

A survey of OEMs, channel partners, and brokers was conducted todiscern their involvement with gray market activity and discovered thatauthorized dealers (1) regularly receive offers from the gray marketers(38 percent); (2) freely admit to complicity in the gray market (66percent); and (3) mainly deal with the gray marketers owing to a lowerprice and sometimes faster delivery [KPMG 2008, p. 23].

Volume of demand

In international trade, a primary reason for gray markets todevelop is supply shortages in the importing country [Cavusgil andSikora 1988]. Gray markets have exacerbated drug shortages forpharmaceuticals in the United States for life-threatening illnesses,such as cancer, owing to profit incentives of supplying excess demand[Shining Light on the Gray Market 2012]. Overall, if the gray marketerseeks profits through volume of goods sold, a product must have ageneral appeal to local consumers who will not doubt the authenticity ofthe good [Howell and others 1986].

The gray marketers would prefer a hom*ogeneous product presentationto provide an attractive gray market for the good as they must considerthe extent to which the product resembles the original good (that is,the authorized product in the import market) and the extent ofrepackaging that is required to sell in the import market [Bird andChaudhry 20101. Would a U.S. consumer consider purchasing a camera witha warranty card and operators manual in Spanish, Japanese, or Urdu? Thegray market camera is authentic; however, the packaging, warrantyinformation, and the like will create uncertainty about the authenticityof the product. Therefore, we know that the greater the hom*ogenousproduct presentation of the parallel good, the greater the probabilityof a gray market; but, in some cases, the gray marketer can re-packagethe good to provide a standardized appearance [Bird and Chaudhry 2010].

6. Legal Decisions that Govern Gray Markets

The debate regarding the legality of gray markets in the UnitedStates centers on trademark law, specifically

(1) universality or trade identity and territoriality and

(2) exhaustion.

Universality or trade identity and territoriality

A trademark signifies the origin of the product, not the channel ofdistribution of the product. Thus, if the gray market good is genuineand there have been no attempts to falsify the product's origin,the courts are likely to rule in favor of the gray marketer under the"first-sale doctrine." As the laws can be many and variedacross national markets [Palia and Keown 1991; Weigand 1991; Chang 1993;Chaudhry and Walsh 1995; Bird and Chaudhry 2010; Conroy 2011], wehighlight the legal ambivalence of rulings on universality andterritoriality by using two U.S. court cases: Kirtsaeng v. John Wiley& Sons, Inc. and Omega, S.A. v. Costco Wholesale Corporation. Wehave selected these cases because judicial interpretation of thefirst-sale doctrine has yielded mixed results.

Kirtsaeng v. John Wiley & Sons, Inc. The U.S. SupremeCourt's decision of the case Kirtsaeng v. John Wiley & Sons,Inc. involved judging the legality of Supap Kirtsaeng obtainingtextbooks in Thailand and reselling them in the United States for aprofit [Stohr and Asseo 2012]. Supap Kirtsaeng had originally been fined$600,000 in the lower U.S. courts to pay John Wiley & Sons forcopyright infringement for this trade diversion. However, in 2013, theU.S. Supreme Court, in a 6-3 decision, ruled in favor of Supap Kirtsaengwith a landmark decision that upheld the first-sale doctrine [Jeong2013]. This doctrine governs the legal principle that a copyright holdercan only realize a profit from the original sale of the product [Stohr20131. This implies that a company cannot prevent the merchandise fromre-entering the United States and being sold to consumers, despite thefact that in this case the book was manufactured as an Asian edition.The Supreme Court decision permits parallel traders to obtain productsin other countries, such as Thailand in this case, and resell themerchandise on internet auction sites, such as Amazon and EBay, andretail stores in the United States [Dembosky 2013].

Omega, S.A. V. Costco Wholesale Corporation

The Supreme Court's decision on the John Wiley case basicallyoverturned the Omega, S.A. v. Costco Wholesale Corporation case (2008)that had previously ruled in favor of the copyright holder, Omega, toprevent Costco (the gray marketer) from reselling its watchesmanufactured in another country into the U.S. marketplace. A review ofthis case reveals a zigzag of court decisions that first ruled in favorof Costco under the concept of the first-sale doctrine. Later, thisdecision was reversed by the U.S. Ninth Circuit Court; and Omega, theSwiss watch manufacturer, prevailed as the watches were manufacturedoutside of the United States. The case reached a stalemate in the U.S.Supreme Court with a 4-4 decision (Supreme Court Justice Kagan did notparticipate in this decision), and thus the Ninth Circuit Court'sdecision was upheld [Brooks 2010] .

Exhaustion

Under the concept of exhaustion, the trademark owner loses allrights to the product after it has been sold to a channel member, suchas a licensee or authorized distributor. In 1993, the case Lever Bros.v. United States resulted in what is commonly referred to as the LeverRule. In this time frame, the litigation centered on trademarkinfringement relating to the problem of gray goods obtained overseasbeing resold into the United States that were materially different thanthe current goods sold in the U.S. marketplace. This court rulingrequires a parallel trader to affix labeling on the product to warn thefinal consumer that the product is not identical to U.S. products soldthrough authorized channels [Ladas & Parry LLP 2013].

7. Employing Strategies to Diffuse the Gray Market

There are few studies that offer universal strategies for firms toassail gray marketers [Lansing and Gabriella 1993]. In general, thesestrategies rely on the premise that pricing can be controlled to acertain extent by the firm, such as by instituting a "one price forall" policy [Howell and others 1986] or an "aggressiveconfrontation by means of price-cutting" strategy [Cavusgil andSikora 1988]. A company can employ both reactive strategies, that is,ways to reduce the level of a gray market that already exists; andproactive strategies, that is, maneuvers to prevent a gray market fromoccurring in the first place. We provide a brief discussion of a fewantigray market stratagems in the next section.

Reactive: Strategic confrontation

The firm must decide how to support its authorized channel members,such as through dealer education, in order to prevent the gray marketerhaving access to its supply chain. In the report, When ChannelIncentives Backfire: Strategies to Help Reduce Gray Market Risks andImprove Profitability [AGMA and Deloitte 20111, the analysts honed in onthe fact that many firms use a variety of incentives to sell theirproducts through a large number of channel partners. These incentivescan provide a means of access for gray marketers.

Table 1 illustrates the magnitude of "stacked" incentivesgiven to sell the product--in this case a total of 55 percent off thelist price. In this study, the respondents claimed to have given atleast 25 percent in incentives for each product sale. Clearly, usingthis type of incentive scheme will make the product much cheaper in themarkets targeted for the incentive, and a gray marketer can simply buyin the channel at a lower price and resell the product in another marketwhere the price is closer to the list price. One successful graymarketer claimed his company (a reseller) profited from IBM'svolume purchase agreement where customers were awarded large discountsfor buying hundreds of terminals at a time--the firm literally boughtand resold every machine through the gray market [Marion 2013]. Theentrepreneurial parallel trader said that it took IBM several years tofinally put in the contract that his firm was the end user in order toget the incentive--thus ending the company's ability to resell themachines [Marion 20131.

Table 1. Stacked Incentives in the Channel of DistributionList Price $1,000Contractual discount (25%) ($250)Channel partner accreditation (12%) ($120)Programmatic (8%) ($80)End user (10%) ($100) Net revenue: $450Source: AGMA and Deloitte [2011, p. 7]

Thus, one strategy is to legally constrain reselling as a conditionfor channel partners to receive incentives for volume purchases.

Reactive: Supply interference

Another strategy relies on the manufacturer's ability tocontrol the supply chain of the product at either the wholesale and/orretail level to effectively impede the access of its goods to the graymarketers. In essence, the manufacturer limits the amount of volume orcreates erratic delivery dates to make the gray market a less lucrativesource of supply for buyers. Apple has used an ad hoc supplyinterference strategy to clog the supply of its iPhones to thwart thegrey market in China [Luk 2013]. The firm's initial solution was totemporarily close the doors (at its stores) in Beijing, triple theamount of security guards, and start an online booking system forappointments to allow a single purchase of just one phone per day.

Proactive: Strategic pricing

David R. Sugden, in Gray Markets: Prevention, Detection. andLitigation, comments on the futile endeavor of a brand owner to have aworldwide pricing tactic as follows [2009, pp. 115-116]:

There will always be some form of price variation between countrymarkets and the key (albeit to a difficult puzzle) is to deliberate howthe company can manage price to the point where a gray marketer does notdetect a profit incentive.

Proactive: Marketing information systems

Overall, predicting the size of a gray market is a difficult task,and a marketing information system should be developed that wouldmonitor red flags that are key indicators of gray market activity: (1)pricing that is too low; (2) unreasonable spikes in orders; (3) unusualorders; (4) special discount requests; (5) warranty exchange requests;and/or (6) unusual delivery requests [Sugden 2009, pp. 123-1291. Toscrutinize the gray market, Sugden recommends these methods of detection[pp. 131-142]:

* Audits--the brand holder should have written into the contractswith its distributors and resellers the right to conduct audits, such asrandom spot checks, and can use point-of-sale reports to gauge illogicalsales activity;

* Internet monitoring--the Web provides a wide distribution channelfor both counterfeit and gray market goods. The problem lies with theabundance of information that must be scrutinized on auction sites, suchas Amazon or EBay. A firm can retain an outside service, such asMarkMonitor [www.markmonitor.com] or Channel IQ [www.channeliq.com] toperform this task.

* Brand Protection Purchases--the firm may elect to hire mysteryshoppers to pose as legitimate customers, to covertly assess the graymarket behavior of the authorized channel members.

* Informants--a gray marketer can work with an elusive identity,but the operation may be known to possible informants who can provideinformation to the brand owner. Paul Mitchell, a manufacturer of salonproducts, uses both its company website and toll-free phone numberhotline as a means for informants to report diverted products[www.paulmitchell.com/Pages/ContactUs.aspx].

* Dumpster Diving--a firm can search a suspected channelmembers' trash to gather evidence (for legal implications of thismeasure, see California v. Greenwood, 2014). Through the employment ofoutside investigators, a firm may search through a channel member'spaperwork in the dumpster to gather evidence of alleged trade diversionin the authorized channel.

8. Conclusion

The goal of this paper was to educate business economists,managers, and policymakers on the topic of gray markets. Pricedifferentials, market access, volume of demand, and the legal status ofgray markets will continue to foster this type of trade diversion. Theincreased level of global business and the decrease of barriers totrade, especially free-trade agreements, such as the North American FreeTrade Agreement, will continue to help gray marketers move thecompany's product from one market to the next withoutinsurmountable obstacles. The recent legal cases put forth in U.S.courts are a quagmire of different decisions that can be overturned in arelatively short time frame. The two separate cases involving John Wiley& Sons and Omega are testimony to this type of legal discourse basedon divergent judicial interpretations of the "first-saledoctrine."An overview of a few antigray marketing strategies wasprovided to allow brand owners to start contemplating feasible ways toat least counterattack the parallel traders by working with authorizeddistributors and creating novel marketing information systems tocircumvent the problem.

REFERENCES

AGMA, 2014. Gray Market: Leading the High-Tech Industry in BestPractices fin-Preventing Gray Market Fraud,http://www.agmaglobal.org/cms/index.php?page=Gray-Market (accessed May3, 2014).

AGMA and Deloitte, 2011. When Channel Incentives Backfire:Strategies to Help Reduce Gray Market Risks and Improve Profitability,http://www.deloitte.com/us/pr/gaymarketrisks (accessed April 14, 2014).

Anita, KerSi D., Mark Bergen and Shantanu Dutta. 2004."Competing with Gray Markets."Sloan Management Review, 46(1):63-69.

Assmus, G. and C. Wiese. 1995.. "How to Address the GrayMarket Threat Using Price Coordination."Sloan Management Review,36(3): 31-41.

Bird, Robert C. and Peggy E. Chaudhry. 2010. "Pharmaceuticalsand the European Union: Managing Gray Markets in an Uncertain LegalEnvironment."Virginia Journal of International Law, 50(3): 719-756.

Brooks, Samuel. 2010. "Battling Gray Markets through CopyrightLaw: Omega, S.A. v. Costco Wholesale Corporation."Brigham YoungUniversity Law Review, 2010(1): 19-33.

California v. Greenwood, 2014.http://www.casebriefs.com/blog/law/criminal-procedure/criminal-proCedure-keyed-to-israel/arrest-search-and-seizure/california-v-greenwood/(accessed May 7, 2014).

Cavusgil, S. Tamer and Ed Sikora. 1988. "How MultinationalsCan Counter Gray Market Imports."Columbia Journal of WorldBusiness, 23(4): 75-85.

Chang, Tung-Zong. 1993. "Parallel Importation in Taiwan: AView from a Newly Emerged Country and a ComparativeAnalysis."International Marketing Review, 10(6): 30-41.

Chaudhry, Peggy and Michael Walsh. 1995. "Managing the GrayMarket in the European Union: The Case of the PharmaceuticalIndustry."Journal of international Marketing, 3(3): 11-33.

Works, (March 19), http://ladas.com/exhaustion-finnally-exhausted-in tern ati o nal-e xhaustion-n o w-applies-copyrighted-works/(accessed June 5, 2014).

Lansing, Paul and Joseph .Gabriella. 1993. "Clarifying GrayMarket Gray Areas."American Business Law Journal, 31(2): 3-13-337.

Luk, Lorraine. 2013. iF'hone's China Launch Pinches GrayMarket. Wall Street Journal (September 18.), http://blogs. w sj com/digi ts/2013/09/18/iphones-china-1 aunch-pi nches-gray-market/ (accessedApril 15, 2014).

Mahajan, Vijay. 2012. The Arab World Unbound: Tapping into thePower of 3.50 Million Consumers. Jossey-Bass.

Marion, Joseph. 2013. The BIG Lie about the Gray Market,http://www.ascdi.com/asna/docuinents/marionarticles/The%20Big%20Lie.pdf(accessed May 5, 2014).

Nakra, Prema. 2006. Gray Marketing: Taming the Beast. InternationalTrade Blog, http://www.shippingsolutions.com/blog/gray-marketing-taming-the-beast (accessed September 20, 2014).

Nolan-Haley, Jacqueline. 1983. "Competitive Process and GrayMarket Goods."New York Law School Journal of International andComparative Law, 6: 231-251.

Palia, Aspy P. and C.F. Keown. 1991. "Combating ParallelImporting: Views of U.S. Exporters to the Asia-PacificRegion."International Marketing Review, 8(1): 47-56.

Shining Light on the "Gray Market:" An Examination of WhyHospitals are Forced to Pay Exorbitant Prices Ibr Prescription DrugsFacing Critical Shortages, 2012. A staff report prepared for SenatorJohn D. Rockefeller IV, Senator Tom Harkin, and Representative Elijah E.Cummings. http://democrats.oversight.house,gov/sites/democrats.oversight.house.gov/files/migrated/uploads/7.25.12%20Staff%20Report%20Shining%20Light%20on%20the%20Gray%20Market.pdf (accessed September 22, 2014).

Simpson, Campbell. 2012. Nikon Fights Grey Imports with "Peaceof Mind" Campaign.http://www.goodgearguide.com.au/article/417587/nikon_fights_grey_imports_peace_mind_campaign/ (accessed May 6, 2014).

Stohr, Greg. 2013. EBay Wins as Top Court Backs "GrayMarket-Discount Goods. Bloomberg (March 19), http://www.bloomberg.corn/news/2013-03-19/-gray-market-backed-by-high-court-in-win-for-discounters.html (accessed April 20, 2013).

Stohr, Greg, .and Laurie. Asseo. 2012. U.S. Supreme Court DebatesCopyright "Gray Market" Case. BloombergBusinessweek (October29), http://www.businessweek.com/news/2012-1-0-29/u-dot-s-dot-supreme-court-debates-copyright-gray-market-case (accessed May 3, 2014).

Sugden, David R. 2009. Gray Markets: Prevention, Detection andLitigation. Oxford University Press.

Weigand, Robert E. 1991. "Parallel Import Channels--Optionsfor Preserving Territorial Integrity."Columbia journal of WorldBusiness, 26(1): 53-60.

Xiao, Ying, Udatta Palckar and Yunchuan Liu. 2011. "Shades ofGray--the Impact of Gray Markets on. Authorized DistributionChannels."Quantitative Marketing and Economics, 9(2): 155-178.

Caption:Source:Adapted from Assmus and Wiese[1995,p,32]

<FOOTNOTE>

(1.) There are also gray markets in securities, but these are notaddressed in this paper.

(2.) In this paper. the terms "gray market" and"parallel trade" are synonyms to describe the unauthorizedsale of goods across and within markets.

*Peggy E. Chaudhry is an associate professor at the VillanovaUniversity School of Business. Her research focuses on intellectualproperty and illicit trade issues, particularly, counterfeit and graymarkets. Her publications include managerial tactics to curb counterfeittrade, consumer complicity with counterfeit goods, and gray markets. Shehas both pragmatic work and academic research that includes journalarticles and two books. She has been invited to speak or give testimonyon the protection of intellectual property rights to a variety ofaudiences that include the U.S. Government Accountability Office, theU.S. International Trade Commission, and the Organization for EconomicCooperation and Development. She received her Ph.D. in InternationalBusiness with minors in International Economics and Marketing from theUniversity of Wisconsin at Madison.

 Parallel imports (also known as gray market goods) refers togenuine branded goods that are imported into a market andsold there without the consent of the owner of the trademark (2)The goods are "genuine" goods (as distinct from counterfeitgoods) in that they have been manufactured by or for orunder license from the brand owner. However, they may havebeen formulated or packaged for a particular jurisdiction,but then imported into a jurisdiction other than that intendedby the brand owner. The gray market has many sources, i e., unauthorized dealers obtainproducts from a variety of sources normally at discounted price eitherdue to price arbitrage, abuse of incentive programs, or simply becausethe products are not what they seem. For example, an OEM may choose todiscount products for a particular end customer to increase sales,especially if there is stiff competition for that customer. To obtaindeeply discounted products for open-market speculation, a channelpartner may deceive the OEM into deep-discounting products fornon-existent customers and then divert those products to the graymarket for possible greater gain. The proposal that globally fixed prices will eradicate thegray market has two fundamental flaws. As an initial matter,it ignores the de facto price discrimination that will remaindepending on the national or state taxes levied on products ...Second, disparate pricing schemes are a mandated reality ofbusiness. It is naive to suggest that brand owners can solvethe problem by having their laptops sell for the same price inManhattan as they do in Jakarta.