All about Business and management

July 13, 2007

Gray market

Filed under: Business management — Jagdish Hiray @ 2:08 am

             This article focuses on how Gray market develops, what factors are responsible for creating Gray market and how it affects firms. 

            A corporate firm generally adopts three type of pricing policies: Standard, two tiered and market pricing policy. In case of standard price policy, firm charges the same price for its products and services regardless of where they are sold. In case of two-tiered pricing policy, firm sets one price for all its domestic sales and different price for its international sales. In case of firm using market pricing policy, prices of goods varies on a market-by-market basis to maximize its profit in each market. Those firms, which follow market-pricing model, might get into notion called ‘arbitrage of goods’.  

             If price of the good differs between two markets (or country) there is tendency to buy good in the market with lower price and resell it in the market offering the high price. A Gray market is a market that results from arbitrage of goods. A Gray market is a phenomenon by which products are imported into country or bought to the market by other means of channels other than once authorized by the manufacturer. Firms those follow market pricing policy risks development of gray markets for its products as a result of arbitrage. 

            Gray markets generally arise when firm fails to adjust local prices after fluctuations in exchange rates. Gray markets are commonly seen in those countries having free market economy. Gray market sales can causes loss to firm and poosible damage to its distribution network due to price differences.



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