Profitable gray market with asymmetric costs

Qing Hu and Tomomichi Mizuno

Applied Economics Letters, 2025, vol. 32, issue 16, 2375-2379

Abstract: When manufacturers sell their branded goods at different prices in different markets or channels, gray marketers buy goods in the low-priced market and resell them in the high-priced market to compete with the manufacturers’ authorized sellers. Conventional wisdom suggests the lost sales in the high-priced market resulting from the gray market’s diversion always make manufacturers worse off. However, by purely considering the marginal production cost in the high-priced market is higher than the low-priced market, we show that the manufacturer can gain from gray markets, which contradicts to the conventional result. It happens when the production is significantly less efficient in the high-priced market than in the low-priced market.

Date: 2025
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DOI: 10.1080/13504851.2024.2332590

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