Wednesday, 18 March 2009

Gray Markets

Gray markets arise when a manufacturer’s products are sold outside of its authorized channels, for instance when goods designated for a foreign market are resold domestically. A grey market or gray market is the trade of a commodity through distribution channels which, while legal, are unofficial, unauthorized, or unintended by the original manufacturer. In contrast, a black market is the trade of goods and services that are illegal in them and/or distributed through illegal channels, such as the selling of stolen goods or illegal items such as heroin or unregistered handguns.

In gray markets, the goods are sold outside normal distribution channels by companies which may have no relationship with the producer of the goods. A private person or business purchases the good at retail, wholesale, or a discounted price, and attempts to resell it legally at a higher price. Examples of industries with active gray markets include pharmaceuticals, automobiles, and electronics.

Importing certain legally restricted items such as prescription drugs or firearms would be categorized as black market, as would smuggling the goods into the target country to avoid import duties. A related concept is bootlegging, the smuggling or transport of highly regulated goods, especially alcoholic beverages. The term "bootlegging" is also often applied to the production or distribution of counterfeit or pirated goods.

The gray market is extremely hard to track, because once a good is sold to an unauthorized dealer, the manufacturer has no way of tracking the sale of the goods. The gray market exists just about everywhere. Under some circumstances, different countries have different markets for different goods. When a person takes advantage of the disparity in market prices of a particular good, it is called arbitrage. An arbitrageur takes advantage of this disparity by buying a good in a country where it is significantly cheaper, then reselling it legally in another country where they can demand a higher price. For eg. The grey market in wine flourishes, particularly in the case of champagne. Many large champagne producers do their own importing, and desire to maintain independent price points in different markets. Thus a bottle of Champagne might cost US$35 in the United States while the same bottle might be only 15 Euros in France. It is often profitable to buy the wine in Europe from an authorized distributor, and resell it in the US.

One drawback of the gray market is that many manufacturers will not honor warranties on electronics purchased through it. Because the good is not purchased through “authorized” channels, manufacturers refuse to spend the money to honor the warranty. One of the ways that manufacturers identify items resold on the gray market is by putting different model numbers on the same product in different countries. When someone calls for warranty issues, they can identify whether their product was sold in the correct country. The warranty cannot usually be enforced, because it was sold through a third party in a different country.

On securities markets, grey market has a different meaning. It refers to the buying and selling of securities to be issued in the future and, therefore not yet circulating. This typically occurs some days before an auction of government bonds or bills and that trading is subject to the effective issue of those securities. Sometimes this is taken as a forecast of the prices that markets expect for future issues.

Authorized agents and sellers are most often financially affected by the gray market, because they lose business to unauthorized sellers. Local laws can help or hurt the gray market. In some cases, food is difficult to resell because local laws dictate packaging, so what is legal in one state or country may not be in another. On the one hand, consumer advocates and governments have applauded the increasing role that gray markets have played in improving competition for domestic goods.

Low tariffs and free trade are beneficial to the gray market, but manufacturers and big business lobby constantly to enact laws to make it difficult for gray marketers to do business. This, coupled with advances in technology, make the most popular goods difficult to resell on the gray market.

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