Competitive markets

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In today's competitive markets, manufacturers increasingly rely on their authorized distributors to perform value-adding functions (Coughlan et al. 2001). To safeguard distributor incentives to action these services, manufacturers typically deploy resale restrictions through explicit contracts or implicit agreements. By circumscribing to whom distributors may sell, resale restrictions limit intrabrand competition and maintain provider margins. Gray market activity-that is, the sale of genuine trademarked products finished distribution channels unauthorized by the manufacturer or sort owner-poses a direct and significant threat to manufacturers' deployed resale restrictions.

Given free reign, gray markets create free-riding problems across distributors that provide customer service, make a selective distribution system more intensive, and harm distributors that have made specific investments in the channel of distribution. Gray marketing is problematic for manufacturers because it crapper have a negative impact on distributor relations and the manufacturer's sort equity, ultimately undermining the state of the distribution channel (Corey, Cespedes, and Rangan 1989) Gray markets are endemic across, though not limited to, a wide variety of industries, ranging from heavy construction equipment, individualized computers, and cellular phones to perfumes, watches, individualized care, and other consumer products. Estimates of gray market activity range from $10 billion in economy-wide annual gray market income to $20 billion in the information technology sector lonely (estimate by the Alliance for Gray Market and Counterfeit Abatement).

Exclusive territory distribution arrangements are widely used in some markets. They commonly take the form of a geographical system, which assigns distributors to particular sales areas or territories (Klein and Murphy, 1988; Katz, 1989). Under such a composing a distributor is restricted from selling outside of a particular territory, and other distributors are limited from selling into the territory in question.

These assumptions are existence challenged by recent evidence of wear market activity, in the form of unauthorized sales which violate established distribution restrictions. In total, it has been estimated that 'gray market' state amounts to $10 billion annually (Cespedes et al., 1988; Fleischut, 1989) and is growing at an annual rate of 22% (Lowe and McCrohan, 1989).1 Thus, ex post management of regional arrangements can be a significant problem. Interestingly, while a substantial literature exists on the initial deployment of inner territories, the topic of managing violations is poorly documented. Industry observers typically recommend the extreme options of (1) rank enforcement, involving conclusion of all violators, or (2) complete abandonment of restrictions. It is noteworthy, however, that some firms pursue intermediate strategies and actually tolerate violations.

Parallel importing has attracted increasing interest in the planetary practice, and concern to manufacturers and retailers since the mid-1980s (Mitchell 1998; Eagle et al. 2003). In the case of Silhouette in July 1998, the European Court of Justice (ECJ) arrived at a judgment that relaxed the definitions of cartels, toll controls, and market manipulation. With the support of the European Commission and many EU governments, the court has effectively limited wear imports into the EU market (TheEconomist 1998). The so-called nonconvergent goods or wear marketing arises when a marketer imports branded products from abroad, then diverts and sells them through unauthorized channels (Inman 1993). Gray markets are not generally considered illegal, in contrast to the black market of stolen or counterfeit goods. Rather, gray goods are genuine in terms of their manufacturer, but their organization is unauthorized. Only when the wear artifact violates either the creation regulations or the licensing contract of the trademark owner, gray-marketed artifacts are illegal (Palmeter and Remington 1988). In the paper, nonconvergent importing and wear marketing are utilized interchangeably and indicate the same meaning. Although there is no official accumulation on the size of planetary wear markets, parallel goods is generally thoughtful a significant phenomenon (Chen and Maskus 2005). The estimated market size of planetary wear artifact range from $7 billion to $10 billion U.S. dollars (Mathur 1995; Eagle et al. 2003). According to the estimates of National Economics Research Association (NERA), nonconvergent imports account for between 5% and 20% of change within the EU for such artifact as consumer electronics, cosmetics and perfumes, musical recordings, and fleecy drinks (NERA 1999). Some IT companies, including 3Com, Apple and HP, established a so-called 'Anti-Gray Market Alliance' in order to lobby against the goods of wear market goods in September 2001. They argued that the figure of wear artifact has substantially low their profits. Recently, Levi's retailers resorted to law to restrain the largest retailing store Tesco to sell Levi's jeans, because Tesco imports the jeans from other markets and sells them in the UK market at a low price.

However, in order to compete with the wear goods, Levi's announced in late April of 2003, that its Signature Series was to be sold in some reduction stores such as Wal-Mart. (Voyle 2003). In sum, there is grounds of tension between attempts to open parallel imports and attempts to protect trademark owners from its impact (Mitchell 1998). As wear artifact are not counterfeit goods, the question of whether the goods of gray artifact with genuine trademarks should be restricted has raised fierce debate. As mentioned earlier, the decision by the ECJ was ruled upon the request of some trademark owners including creation manufacturers and their commissioned retailers. Their arguments are summarized as follows: First, the manufacturers stated that they have the right to determine channel structures for their products and subsequently to ban the imports of gray artifact into the EU. Second, wear marketers of times maintain significantly higher gross profit margins only because they not only take away the market share of authorized retailers, but also free-ride on the marketing communications performed and customer services provided by their commissioned counterparts. Therefore the sales through gray channels module likely perceive commissioned channels. Some works have been finished in solving these problems. For example, Gallini and Hollis (1999) employed a contractual structure model to harmonize the benefits between commissioned retailers and gray marketers. Third, since the prices of wear artifact are usually lower than their authorized counterparts, this haw perceive not only the existing consumers but also potential consumers due to a lower level of assist by commissioned retailers and lower investments made by manufacturers in creation improvement and advertisement.

However, the impact of wear marketing on manufacturer's profit is ease rather vague. As argued by Bolton and Bonanno (1988) when one manufacturer is dealing with many retailer's (parallel importers are one type of retailer) vertical restraints, (e.g., resale toll fix and franchise fees) they do not change vertical efficiency. Moreover, Shepherd (1997) proved that if manufacturers crapper use price discrimination to sell their products according to obligation elasticity, they crapper increase both their market shares and profits, reducing the competition among brands. In the international context, however, Mitchell (1998) argued that wear marketing has an unexpected impact on branding and brand equity, which had actually assist in the penetration of foreign products into a husbandly market, increasing the market share of the products. This explains why only a some manufacturers in EU joined forces against nonconvergent goods into the EU market. On the other hand, it is widely perceived that commissioned retailers could provide meliorate services (e.g., warranty of product quality, creation display, and customer service, etc.) than wear marketers.

Therefore, the main purpose of this paper is to examine the profits of manufacturers when their commissioned retailers are person to nonconvergent importation. Numerous studies have been successful in investigating the issue of parallel importation. For example, Landes and Posner (1987) analyzed the structure of trademark law by using an economic model. They found that tort law could be used to promote economic efficiency. Some literature has investigated effects of parallel importation from the perspective of arbitrage on toll discrimination or liberated ride on intellectual property right. Telser (1990) argued that the nonconvergent importing is characterized by a free-rider problem. He examined digit arguments (i.e., monopoly and producers' cartel) associated with different market structures to vindicate why some manufacturers haw impose resale toll fix on distributors. Malueg and Schwartz (1994) are the first to conduct a formal psychotherapy of nonconvergent importation. They proposed a model which assumed the nonconvergent imports were caused entirely by international third-degree toll discrimination by a manufacturer, not by free-riders. They found that a uniform pricing strategy could be disadvantageous to small countries, and that a mixed system could improve the global welfare. Given this, they argued that international trading rules should not be built on the basis of an individualist country.

Anderson and Ginsburg (1999) further thoughtful consumer arbitrage outlay in parallel imports, in a scenery of both third-degree and second-degree planetary price discrimination by a monopoly. Richardson (2002), on the other hand, proved that many small countries (e.g., Singapore, New Zealand, and Australia) allow parallel importations. He also indicated that modify though the mix system crapper improve the world welfare, each individualist government is not interested in improving the world welfare, and that it is very difficult for the governments to harmonize their benefits by multilateral change negotiations. Finally, Chen and Maskus (2005) concluded that restricting nonconvergent imports tends to increase global welfare when change outlay is high, but it haw reduce welfare when change outlay is low. Therefore, open trading regimes haw be most appropriate within regional change agreements. In sum, literatures on the economic impacts of nonconvergent goods have mainly focused on analyzing toll discrimination and global social welfare. To our best knowledge, there has been very limited economic psychotherapy on examining the efficiency of nonconvergent goods on manufacturers and commissioned channels.

The authority of any marketing transaction can be viewed in following dimensions;

  1. the legality or illegality of the manufactured goods (good or service) involved in the business deal
  2. legality or illegality of the way by which the product is circulated

The description of the shadow system (i.e. legal vs. illegal) can vary crosswise time or across authority. For example, gambling is completely banned in many communities and hence may be in the class of services that are prohibited for general spending. In a different place gambling is allowed in some incomplete form, like state lotteries, and in those circumstances it is a service provided inside the legal marketing system. The description of the shadow system is unclear because of doubts in definitions of authority that create gray regions between the genuine marketing system and the shadow system. These doubts are often due to conflicting definitions of authorized and unlawful distribution practices. One such gray region has augment as a result of parallel introduction of trademarked products. As a result, this is usually called gray marketing. Gray marketing engages the selling of trade-marked goods through channels of delivery that are unauthorized by the trademark controller. It can engage unauthorized distribution of goods either within a market or across markets. Gray marketing occurs inside a market when manufacturer-authorized channel associates sell trademarked goods to illegal channel members who subsequently distribute the goods to customers within the similar marketplace. This practice is tagged "channel stream diversion" given by Rubin (1986). For example, quantity discounts may stimulate certain dealers to penetrate the gray area because they can acquire larger amount of product than they require and can sell the additional units at a profit all the way through gray market channels. This happened recently in the personal computer area when IBM was giving 30 to 40% discounts on amount purchases of its goods (Ramirez 1985). When gray marketing occurs across authorized markets it is typically in an worldwide setting, hence the expression "parallel importing." Parallel introduction arises when trademarked manufactured goods arrive in American retail channels later than being imported into the United States of America by banned distributors. Manufacturers often create and sell products in addition than one country and set up a network of authorized traders in each country. Parallel importation arises when goods aimed for one country are unfocused into an unauthorized circulation network which then introduces the goods into a different country (Maskulka 1987). The lawsuits subsequently all entail parallel importing circumstances, but the term "gray market" includes both parallel introduction and channel stream diversion within markets. Gray marketing is not the advertising of counterfeit goods. Counterfeit goods have received wide consideration in the press lately and the dilemma seems to be intensifying (Cavusgil, Sikora, and Weinstein 1986;) Counterfeit goods are a clear destruction of the trademark holder's rights in that the goods are not genuine and do not initiate from the trademark holder. Hence businesses involving counterfeit goods are strictly shadow marketing dealings because the creation is illegal. Such goods are obviously subject to the supplies of the Lanham act wrapping trademark violation. If the trade name is listed on the national register, any counterfeit goods inflowing the United States of America can be detained by U.S. Customs and shattered. In the case of parallel introduction, the product itself is a authentic trademarked product. The issue of the authenticity of gray marketing does not engage the legality of the goods, but the legality of the way by which the goods are distributed. Many of the issues discussed in the framework of gray marketing engage manufacturers as the trademark holders. However, trademark belongings an reside with other control members ( eg retailer like Sears). Whether the owner of a trademark is the authentic manufacturer, a certified producer, a distributor, a vendor, or other channel associate is not essential, gray marketing can affect any trademark owner.

Why Do Gray Markets Develop?

Three conditions are necessary for gray markets to develop. One is that the product(s) must be available in other markets (e.g., internationally). Gray marketers must have a source of supply. This condition is readily met in today's rapidly homogenizing global markets. The second condition is that trade barriers (excise duties, carrying costs, rural restrictions, etc.) must be low capability that gray market importers can move the products from one market place to another. The countryside status of parallel introduction activities is the focus of cases currently being considered by the Supreme Court. At present, the barriers are low sufficiency that this kind of parallel importation is widespread. The third condition is that price disparities among different marketplaces must be great enough to offer the basic motivation for gray marketing. Such toll differentials arise for different reasons, including currency exchange rates, differences in demand, and segmentation strategies that may be adopted by marketing managers. The fluctuating values of currencies among countries often produce large differences in prices for goods across markets. Parallel importers can take advantage of changes in exchange rates by purchase products in markets with weak currencies and selling them in markets with strong currencies. One reason parallel importing to the United States was particularly profitable in recent years was the strength of the U.S. dollar. For example, gray marketers could purchase Duracell batteries produced by a European subsidiary, import them into the U.S., and sell them for a modify price than could the authorized U.S. distributors (Baldo1985).

Differences in market demand for a product in various markets may drive prices in those markets to different levels. If the authorized channels of distribution are unable to change the market supply to meet the market demand, a price differential may develop that is large enough to motivate unauthorized diversion of products from one market to another. This type of situation was an important factor in the Cabbage Patch Kids case discussed subsequently (Original Appalachian Artworks v. metropolis Electronics 1986). Though currency exchange rates and differences in market demand may be beyond the control of marketing managers, segmentation strategies may result in planned price differentials (price discrimination) among markets. Segmentation strategies are adopted for a variety of reasons, such as differences in product life cycle stage among different markets, customer purchase behavior, and differences in price elasticity. For segmentation strategies to work, threesome conditions must be met. First, marketing managers staleness be able to identify large enough differences in elasticity's between segments within a market (or among markets) to justify segmentation. Second, the firm staleness face a downward-sloping demand curve so that a variety of prices is possible. Third, segments staleness be successfully separated or sealed off from each other (Dean 1951; archaeologist 1981). If these conditions can be met, the firm can earn higher profit by engaging in price point out, many multinational corporations hit different pricing schedules for different countries.

Different Kind of Cost and benefits of Gray Marketing

A key argument in opposition to gray market practices is that the goodwill recognized by the trade name holder is jeopardized because consumers who acquire the goods in the gray marketplace do not get the same extended product. For example, in the Cabbage Patch Kids case, the materials associated with the product, specifically the adoption papers were not printed in arts and clients complained to the certified American distributor, Coleco (Original Appalachian Artworks v. Granada Electronics 1986). This loss of goodwill can be accompanied by a loss of strength within the channel. Channel members haw cease to promote the product, or perhaps modify it altogether, as it becomes available for much lower prices and through another distribution channels. In whatever instances style mark owners haw benefit from wear marketing activities. Gray marketers often appeal to more toll elastic segments of a mart than do the already established organization channels. As a result, the total mart haw be expanded, giving the trademark holder superior sales. If the trademark holder is able to maintain (wholesale) prices in the various market the market development may interpret in to greater profit. Additionally, toll favoritism theory indicates that whatever individual markets are more profitable if (or perhaps profitable only if) toll discrimination can be implemented (Thompson 1981). Thus, though wear mart activities haw not be planned, they can afford trade name holders profit opportunities through toll discrimination. The lack of a manufacturer's guarantee has been cited as a major drawback of gray area mart goods for customers. Some retail stores, particularly 47th Street Photo, present their own warranty, but a retail warranty may not be suitable for consumers who buy through the parcels or by telephone order. Though the lack of a manufacturer's warranty may not be key for an inexpensive product such as a battery, it may be rattling essential For an expensive durable products purchase camera or computer. In many cases consumers do not recognize that the manufacturer's warranty protection is lacking until they have a problem with the product and seek warranty service.

The result may be higher warranty service costs for a manufacturer if such service is extended to the wear market goods or a loss of friendliness if the service is denied.

Another question for consumers who acquire goods on the wear mart is the existence of being disqualified from product evokes and notices originating from the manufacturer. If the consumer does learn of a recall, the certified dealers may perhaps refuse to execute the needed repairs or service on the gray mart good. The capital advantage of wear marketing practices is the consumer advantage of lower prices. Having a product available from both authorized dealers and gray dealers may put downward strain on prices. In the housing of stores with reputations as discounters of brand name merchandise, consumers of times are not only alert that they are purchasing gray market merchandise but also know the amount of the discount. However, as not all retailers are ready to pass their savings on to customers, wear marketing activities are not always valuable to consumers.

Trade Mark theories

Early law reflect on the primary function of a trade name to be an pointer of the product's foundation, that is, to identify who made the product and differentiate it from those made by further people. Additional functions of a trade name that have urbanized over time are to specify a product's superiority, to serve as a means of marketing the product, and to set up goodwill for a business. Another function of a trademark is defined by Cohen (1986), who outlines the expansion of trademark safeguard as it relates to the distribution assessments made by firms. A trade name's "sponsorship" function is discussed as indicating that: goods originate from the similar maker, or have attained the customer through the similar channels as sure other goods that have known the customer satisfaction earlier.(Schechter 1927). As Cohen spots, it is up to the trade name holder to shelter its trademark by dynamically monitoring the market to make sure that its trade name is not misrepresented. Three different theories in trademark law have been applied to gray marketing cases in the United States:

  1. Universality or trade identity,
  2. Exhaustion,
  3. Territoriality.

The fortune of gray marketing performance will be single-minded by which of these three laws succeeds. As the following discussion shows, that these theories are not functional every time.


Under this law of universality or trade identity, a trade name is seen only as sign of the source or origin of the product. This theory does not distinguish the supplementary functions of a trade name mentioned before. If the courts pertain this theory, gray marketing will be permit to continue for the reason that the origin of the product remains the same apart from of the specific direction of the product during the channel of distribution. Because there is no effort to falsify the sources of the product and the good is a real, legally trade named product, under this theory no misconduct has been taken place.


Under the presumption of exhaustion, a trade name holder surrenders all rights after a creation has been sold for the very first time (for instance; licensee or channel associate).If this theory is functional, gray marketing performance will be permitted to continue because the trade name holder's rights stop after the product leaves its control. Apart from the course the product takes during distribution channels, the product remains authentic and therefore nothing has take place against the law.


The theory of territoriality tells that a trademark is effectual only in the country in which it is listed. Under this theory of territoriality, the United States trade name holder can stop gray marketing performance for the reason that owning the trade name in the United States pay for the right to control the trade name's distribution. Therefore, products introduced into the United States manner that trade name would be under the trademark holder's.

Profile of Typical Manufacturers and Antecedents of Gray Market activity:Profile of Typical Manufacturers and Antecedents of Gray Market activity:

While managers have been informed for years of the subsistence of gray market movement, they often have been sluggish to respond to these hazards (Cavusgil and Sikora, 1988). Simply, managers have at their choice either proactive or reactive actions to fight gray market conditions. Proactive measures, though, to some amount rely on recognizing potentially problematic market situation before unauthorized distribution occurs. While studies which are related have identified a number of marketplace and industry definite surroundings where gray market movement destructively affects exporters' productivity these environments are vibrant and certainly are matter to change as economic and cutthroat forces within the marketplace shift. During groundwork, interviews conducted for this particular study, several managers affirmed that they had been working in their export markets for many years before gray market dealers entered their aggressive circles, while others affirmed that they had once been disturbed by unauthorized distribution dilemma, but shifting market circumstances had lessen those effects. Based on a analysis of the literature, three tactical dimensions on behalf of antecedents virtual to gray market movement are identified. These sets of situational definite factors confine the issues vital to understanding unauthorized imports, specifically, control explicit, organizational explicit and market definite factors. The Organizational explicit factors address the expertise, capabilities and potential and as well as positive features of the firm. These summarize international participation and experience (Douglas and Craig, 1989; Terpstra, 1987), product distinctiveness (Cooper and Kleinschmidt, 1985), as well as other facets which deal with the firm's potential to handle its skills and resources. According to Kotabe (1997), the organizational potential viewpoint states that firms are limited in their structural and empirical capabilities to perform all procedures in different markets by themselves. Distribution in these markets is exaggerated by international incidence of the firm as well as by the centralization of assessment within the organizational framework. Similarly, product adjustment as a strategy to meet up market demands produces special problems for consistency of distribution channels (Gatignon and Anderson, 1988). Therefore,the three variables: status local or foreign, its relationship with trade, and product standardization encompass the organizational specific aspect. Control specific factors include distribution control and integration of the channel. This is distinguish from organizational features in that exchange means between producer and distributor are in place which engage operation costs; this, in turn, suppose the behavior of self-centeredness and bounded shrewdness of parties involved in the producer distributor relationship (Williamson, 1975). Here, an task environment survives that involves aspects of the trade process, and entails the participation of trading associates (Jaworski, 1988). This can be a two-sided or independent action. Another set of characteristics which should b taken under the consideration is the consumer characteristics whether the consumer is price sensitive; does the consumer is aware of the existing gray market conditions. Changing situations recommend opportunities for middlemen to operate outside of traditional relationships (Anderson 1986), and the number of markets serve up by the exporter will include to this dynamism. Consequently, the dimension of market definite factors comprises market unpredictability and the quantity of markets supplied by the exporter, these seen as unmanageable external variables, or shows main concern to the profit leaning firm. It is meaningful, thus, to investigate domestic, external, and organize focused characteristics of the export business enterprise in an attempt to identify situations that are common across gray market areas.