The Causes of Parallel Imports

Contents

1.0 Introduction

2.0 Analysis of the Creation and Drivers of Gray Markets

2.1 Price Drivers

2.2 Further Drivers of Grey Markets

2.2.1 Supply Chains

2.2.2 Product Lifecycle

2.2.3 Product Availability

2.2.4 Demand for Foreign Goods

2.2.5 The Internet

2.2.6 Cost of Rural Distribution

3.0 Consumer and Industry Reservations

3.1 Consumer Drawbacks

3.2 Reducing the Impact of Grey Markets

4.0 Conclusion

5.0 References
1.0 Introduction

Parallel imports is the sale of legitimate, often luxury or high value goods being sold through
unauthorized distribution channels without the permission of the intellectual property holder, this is
generally in competition with the authorized distribution channel (Fogal, 1986; Wto.org, 2022). This
phenomenon is also known as the ‘Grey Market’, due to its middle legal ground between ‘White Market’
and ‘Black Market’ trading, where the good or service is being traded through a legal route (e.g. a brick-
and-mortar store or e-commerce website) where the good has initially been purchased through a legal
route (e.g. from the trademark holder themselves, an authorized distributor). This differs from the ‘Black
Market’ where the good is either stolen or purchased illegally and sold through an illegal route (e.g an
illegal website, or through back-alley channels). (Li et al, 2016). A commonly mistaken grey market is
counterfeit goods, this trade is a black market. The sale of counterfeit goods is illegal as the quality of
the non-legitimate goods leads to trademark infringement and is legally treated very differently to the
grey market (Wang, 2020). The trade of parallel imports is strongly associated with increased
international trade as in many instances the product is bought in a market with a lower recommended
retail price by the authorized channels and sold in a market where the authorized channel price is higher
(Ahmani & Yang, 2000; Xiao et al, 2011; Wang 2020). However, price is not the only driving factor of grey
markets. In this essay we will discuss the economic benefits and commercial implications of parallel
imports, as well as the driving factors of why this trade channel exists.

2.0 Analysis of the Creation and Drivers of Gray Markets

2.1 Price Drivers

Price sensitivity and consumer behaviour has been well documented (Ahmani & Yang, 2000; Yang et al,
2011), and as such is used by many governments to encourage, or more often discourage certain
behaviours. In Sweden, you can only buy alcohol over 3.5% in state owned stores and introduced alcohol
taxes in licensed bars and restaurants (Visitstockholm.com., 2021). High taxes and prices on alcohol has
created a grey market for alcohol to be bought at German boarder shops being brought into Sweden
and other Scandinavian countries. Whilst it is intended for these products to be for personal
consumption, once it enters a country it is hard to trace where it goes and who it is sold to.
Non-unilateral pricing and introduction of grey markets allow for price corridors (Dasu et al, 2012),
where prices can also shift due to economic conditions. Even if a company exercises a unilateral pricing
strategy as a method of mitigating grey markets despite profit losses (Antia et al, 2004), it is dependent
on the exchange rate being stable (Cespedes et al,1988).

2.2 Further Drivers of Grey Markets

2.2.1 Supply Chains

The supply chain and storage of products is a primary driver of how legitimate products get into the grey
market. In 2008 44% of the merchandise that was sold through non-authorized routes, was initially stock
from legitimate distributors (KPMG, 2008). Common business operation of selling in bulk and having
contracts where set deliveries and orders must be completed, even if they are no longer feasible for the
distributor sees many distributors finding ways to offload stock that they can no longer manage
(Cespedes et al,1988). However, it is only rouge distribution channels that are moving product into the
grey markets, in the case of the luxury watch industry management are having to decide between the
destruction of excess stock or selling it into the thriving luxury grey market and reducing some of the
production losses (Shannon, 2017; Atkins, 2016; Shao et al, 2016).

2.2.2 Product Lifecycle

In industries where there may be shorter product-life cycles, such as the fashion industry any
miscalculations in demand resulting in overstock, in some cases this can equate to 25% of initial stock
(Dasu et al., 2012). Product lifecycles have further implications, as grey markets often reflect the
maturity of a product (Cespedes et al,1988; Fogel 1986). When consumers become increasingly familiar
with a product, their value for warranties and customer support makes them more sensitive to price,
opening the window for grey markets to enter.

2.2.3 Product Availability

Law of Supply and Demand suggests that where there is a lack of product availability (supply) the price
will increase. In the case where a brand owner has either made an active decision to not distribute to a
country, or where there are regulatory restraints preventing a product being sold, the grey market may
enter in order to provide the supply. The ‘Anti-Grey Market Alliance’ was founded in 2001 – primarily a
group of technology companies lobbying in the U.S congress about the impact of grey markets and
counterfeiting (Agmaglobal.org., 2022). One the members, Apple, was affected by a temporary grey
market in 2014 when the iPhone 6 was released across the world, except in China, where it had not
been able to receive access to the phone network and resulting regulations prevented the sale of their
new product. (Ma & Luk, 2014) The delay in entry into the Chinese market opened the distribution of
grey market iPhone from Hong Kong, with an estimated 1 million iPhones being sold at increased prices.
The restrictions were only in place for a few months and once lifted Apple could sell authorized products
into the Chinese market, and further releases have not been affected.

2.2.4 Demand for Foreign Goods

China in 2008, domestic infant formula and other dairy products were altered to be quickly put through
testing, leading to several child mortality cases, this led to an increase in demand of foreign infant
formula products. Over 10 years later, the demand for non-domestic infant formula in China continued
to create a grey market, where infant formula in Australia is being purchase and sold into the Chinese
market at over 4xs the price (BBC News, 2018). Whilst we have previously discussed that cheaper prices
have driven consumer behaviours in purchasing, an instance where the price has little influence on the
demand is where the trust in the domestic product, as well as in the government to protect, them has
gone (Hancock, 2018; Yan, 2008).

2.2.5 The Internet

Access to the internet increased to 60% in 2022 increasing a consumer's ability to not only the source
products worldwide, but also do price comparisons at a national level to understand where the best
price can be found (Data.worldbank.org, 2022). One of the largest online retailers, Amazon, reported a
worldwide revenue increase of 22% from 2020 to $469.82 billion in 2021 (Retail Site Network, 2022).
Over 60% of this revenue was through third-party retailers, a retailer whose customer service is not
handled by Amazon and in many cases the distribution is also not through Amazon, unless it is eligible
for Prime (Amazon.com, 2022). Amazon actively encourages what they call ‘Amazon Arbitrage’, citing it
as an option of business pricing model in Amazon Seller, where a seller sources popular and up-and-
coming products from online or offline sources to increase the available product range on Amazon
(Rankin, 2015). The practice of allowing, or even encouraging, the grey market trade has become an
area of frustration for authorized sellers, as well as Amazon finding themselves in court defending some
of their third-party sellers over trademark infringement (Fish, 2020).

Specialist third-party retailers are also making the most of the increased access to customers, and the
demand for grey market goods. This can primarily be seen in the luxury goods industry. For example,
Jomashop sells grey market luxury watches and accessories, offering benefits to the consumer of visible
prices, in an industry where it is common for them not to be published, as well as next day delivery and
non-sale discounts averaging between 10-40% (Jomashop.com., 2022). Whilst purchasing from grey
markets comes with risks to the consumer, many of these unauthorized retailers provide their own
warranties and returns policies, mitigating some of these risks.

Whilst these unauthorized channels are selling legitimate products there is also the scope for illegal
counterfeit products also being sold through these channels. This can be seen through customer
research by Forbes, showing increase distrust in third parties such as Amazon and Ebay, with a quarter
of people saying that they would no longer purchase through Ebay (Sularia, 2021).

2.2.6 Cost of Rural Distribution

A brand's presence in a country may not be enough to be able to give access to a product in emerging
markets. Where stores may have a physical presence in a city or even a few cities in a country, where
the population lives outside of these cities, they may not be willing to travel to these locations. This
creates a demand for the grey market to sell into rural areas. Grey markets filling this need in Eastern
Africa and India are providing grey market goods at a transportation premium and increased cost. It was
estimated in 2017 the impact of rural distribution of the grey and black market was up to a quarter to
brand owner profits, at around 257 million handsets (Gsma.com., 2017)

3.0 Consumer and Industry Reservations

3.1 Consumer Drawbacks

Whilst there are many reasons why a consumer may think that purchasing an item through a grey
market is beneficial to them, there are still concerns that need to be understood and the risks weighed
up. Lack of official warranties, the risk of receiving a counterfeit good, as well as the possible risks of
product purchased being repossessed/deceived if it is bought through illegal means (Wang, 2000).

A customer could also have concerns around whether brands are devalued when items are sold through
grey markets and therefore collector items may not hold their value as before.

3.2 Reducing the Impact of Grey Markets

The possible negative impacts of the grey market has been highly researched, from the negatives on
brand trust, to the impact on profits, and the brand equity (Huang et al, 2008; Chen, 2007; Tan et al,
1997; Yoo et al, 2000)

Stackelberg game theory is one way to be able to mitigate the for the completion from grey markets.
First mover advantage to price setting, where the market leader sets the price before the introduction of
a third-party grey market leads to the highest retention of profits for the brand owner (Ahmadi and
Yang, 2000). Other research suggests that the introduction of a third-party distributor leads to ‘spill
over’ for the market leader and an overall increase in market share, it may still lead to an overall
reduction in profit, despite increased demand (Autrey, 2015; Li et al, 2020).

Whilst the research suggests the not all instances of grey markets have a negative impact on the brand
owner, developments in technology are allowing for greater control and visibility of their distribution
networks. Digital certificates and blockchain technologies are being introduced into may industries to
help to mitigate some of the sales into the grey market (The Fashion Law, 2019; Breitling, 2020).

An industry where technology has both increased the market for grey goods, as well as introduced more
options for control is the Gaming industry. Where typically the price for games is lower in Eastern
Europe than in the UK or US, the move toward gaming keys rather than physical copies of games has
increased the ability to purchase a game in one country and sell it to another for profit through an
unauthorised third-party. However, it is possible for gaming companies to revoke these access codes,
reducing the trust in third parties, encouraging purchasing from authorised distributors. Further
developments in the gaming industry are moving towards subscription bases where a code can only be
associated to one account and cannot be transferred, removing this channel of third-party sales
(Harfoush, 2020).

4.0 Conclusion

Grey markets are distribution that has been discussed and researched for 40 years, and with the ever-
increasing prevalence of the internet it is not going anywhere. With increased price competition in
mature markets, the consumer benefits are strong. Whilst there pose some challenges to the brand
owner, in terms of brand equity the third-party distributors generally benefit from this remaining and
therefore pose little threat to doing extensive damage when managed within the extent operational
management and pricing structures.
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