What is the gray market? The term “gray market” refers to a market with unofficial sellers or channels for the distribution of goods, securities, or other commodities. It is a market where buyers and sellers come together as unregulated entities and conduct business or exchange information in order to gain from low prices, few or no regulations, or profit through deals.
Keep reading and learn more about examples and effects of gray market goods, and how to combat it.
Table of Contents
What Is The Gray Market?
New products that are legally sold outside of approved distribution channels are known as gray market goods. This covers everything from clothing and footwear to software and medicine. The gray market has existed for a while. Let’s discuss a condensed retail model to better understand it.
A product will first be sold to a distributor by a manufacturer or brand. After that, the distributor will sell it to licensed retailers who will then sell it to final customers. In a perfect scenario, the appropriate quantity of the product would be produced, distributed to retailers, and consumed entirely by the general public.
But this isn’t always the case. When a distributor or retailer has extra or outdated inventory, they have the option of selling it to other retailers at a loss. These merchants then offer the product to the general public at a reduced cost. Although the term may conjure up a particular mental image, consumers frequently confuse unauthorized dealers with authorized dealers. Lower prices would be the only discernible difference. However, they are unable to provide warranties from the manufacturers, and some goods might not adhere to local legal requirements.
Gray market goods can be distributed either directly by the brands themselves (by selling an old stock) or by other parties further down the supply chain (by retailers or distributors selling off unsold stock).
There are international gray markets as well. Products from international companies are frequently marketed to particular markets and priced accordingly. Nevertheless, buying goods in one nation and selling them in another might be more profitable for resellers. Parallel importing is the term for this phenomenon. Let’s take an example where a company sells cell phones in countries A and B. Comparable phones cost less in nation A than in nation B. Retailers in country B might be able to buy phones in country A after they have been distributed to distributors in both countries, so they can then sell them back to customers in their own country.
What Are The Effects Of Gray Market Goods?
When consumers can easily purchase gray market products online at steep discounts, it can be problematic for brands. Customers might wonder why the item is being sold so comparably cheaply and what is wrong with the brand. In contrast, if customers grow accustomed to the lower price, it might seem like the regular retail prices are artificially inflated.
By eroding distributors’ faith in brands, these products also degrade the effectiveness of a company’s distribution network. gray market products also make it hard to maintain different prices in different markets, especially if the authorized sellers have agreed to an Electronics purchased from unregistered dealers may also include instructions that are written in a language other than English or incompatible charging cables. When someone goes through this, they are likely to attribute the inconvenience to the brand.
Gray market vendors impact authorized retailers in addition to the brand. Customers may believe that the gray market price is the best price for a product because it is simple to find these items online. When a consumer who is aware of this situation enters a store to make a purchase, the retailer might be forced to either walk away from the sale or offer a sizable discount to compete with online prices.
Gray Market Websites
Although they were more difficult to locate before the internet, unauthorized dealers did exist. Large cities were where they were mostly found. To see whether they provide discounts on name-brand items, you had to visit their store in person. If someone wasn’t looking for them, it’s unlikely that they would be aware that there are gray market options.
Everything was altered by the internet. On sites like Amazon and eBay, unlicensed dealers are thriving today. Of course, there are authorized dealers on these websites as well, but their prices must compete with those of the gray market. gray market websites can also cater to specific product niches. Gray market websites for items such as shoes, watches, clothing, cameras, furniture, TVs, and other items can be found with enough research. Any item that is in high demand could possibly appear on unofficial websites.
Regulatory Considerations
Gray market goods that are imported from one country and sold in another might not adhere to the regulations of the second country. For instance, cars are traded on the gray market between states. However, a car built to comply with European regulations might not pass US auto regulations. The car would then need to be modified to meet local standards, which could add a lot of money to the price, on the part of the final purchaser or the unlicensed dealer.
In a similar vein, laws governing children’s toys, medicines, electronics, and other products may vary from one nation to the next. Modification of these products to comply with local regulations is much less likely. Customers must gamble on the products’ compliance with regulations because unlicensed dealers cannot guarantee this.
Gray Market Examples
To comprehend the advantages and disadvantages, let’s look at some examples from the grey market.
Example 1
Consider a scenario where a consumer imports a car for a low cost from a grey market in another nation. Due to the incredibly low combined purchase and shipment costs when compared to local retailers, the consumer imports a gray market vehicle. However, the consumer runs into issues when trying to service and repair a gray market vehicle in an authorized manner.
The reason for this is that the company to which the car belongs has not formally authorized the seller on the grey market. As a result, the buyer will need legal documentation and licenses from licensed dealers or sellers in order to submit insurance claims, obtain authorized auto services, or fulfill other legal requirements. The purchase of appropriate auto parts is also a challenge for owners of gray market vehicles.
Example 2
Let’s say Mark is a small-time investor hoping to make a killing from Ford Motor Company’s impending IPO. He proceeds to invest in Ford Motor Company’s grey market IPO while also being aware of the high reputation and demand for the company’s vehicles market. A broker sells 50 shares at a gray market premium of $500.
However, when these shares go for listing, the price of one share increases to $15 per share from the estimated gray market pricing of $10 per share.
As a result, Mark was willing to take a chance by trading in the unregulated market. He did it because, as a small-time investor, he wanted to make big profits. But due to the high demand for Ford Company IPO shares, he sells these shares to another investor during the official IPO and makes a $250 profit ($750 – $500) by doing so by selling 50 shares. The difference between the GMP and the IPO listing price shares is this profit.
How Do We Combat The Gray Market?
The first step is for brands to approach the gray market globally rather than regionally. Consider cheaper goods that were first offered in Eastern Europe and are now being offered by unlicensed dealers in Italy. The sale to an unauthorized dealer or distributor initially benefits the regional operation in Eastern Europe. When the products are resold in Italy, the brand as a whole suffers. Even if it means losing sales in one market, multinational brands can start by unifying their opposition to supplying unauthorized dealers.
The second is for brands to inform their customers about the value of buying from authorized dealers. Many customers follow the social media accounts of their favorite brands, but if they aren’t made aware of the gray market, they risk being taken advantage of by the steep discounts offered by unlicensed sellers. gray market education should be incorporated into a brand’s media presence to make consumers more aware of the issue.
Customers must be aware of the dangers of shopping on the gray market. gray market websites can’t offer manufacturer warranties, guarantee that regulations are met, or even guarantee product instructions will be in the appropriate language. Customers should be aware that any warranty they receive will be provided by a third party, not the original manufacturer, and that this means that the warranty may not cover the entire product or that customers may have to pay a deductible upfront. Consumer education can significantly reduce the gray market, even though the growth of peer-to-peer payment processing may make it more difficult to do so.
FAQs
How can I check the premium for the gray market?
A GMP is a volume or price at which a broker sells stocks to a customer. Consequently, a broker or issuer may set GMP in accordance with anticipated share demand, a company’s standing in the market, capitalization, etc.
Is the gray market legal?
Sellers sell legal goods like electronics, perfumes, watches, and other items in this unregulated market., or securities. However, there are no governmental organizations in place to oversee the market. For instance, the Securities and Exchange Commission (SEC) of the United States government is the regulatory body in charge of keeping an eye on the securities markets and defending the interests of investors.
How does the black market for shares work?
If their brokers are aware of such transactions or problems, investors may purchase shares on the grey market. There are no agencies or regulating authorities that an investor can turn to in the event of a renege because the market is unregulated. These gray markets are used by issuers and underwriters to gauge interest in upcoming initial public offerings. Deals in the shadow market for securities are also legally binding, but they are not completed until the official release of an IPO.
Final Words
The gray market, as was previously mentioned, is an unregulated market. The grey market is most effectively viewed by the average investor as a predictor of how the stock will fare once it is listed.
Read More: How To Send Money To China?
