Gray Market Analysis in the Presence of Strategic Consumers

Gray market refers to an “informal” sales channel that sells products of a brand in a certain area without authorization of the trademark owner. The price gap between different markets provides speculators the opportunity of speculative arbitrage, by reselling products from low-price supply areas to high-price areas. In this paper, we construct a supply chain model consisting of one manufacturer, two authorized distributors in two markets and a group of independent gray market speculators. The selling period is divided into two stages, where gray markets take place in the second one, and there some strategic consumers who will wait to this stage and may choose to buy products from gray markets. We analyze the manufacturer and the distributors' decisions in the presence of gray markets and strategic consumers, and also discuss the pricing decisions when the manufacturer attempts to eliminate the gray markets.