What Are The Pros and Cons Of The Grey Market? – Understanding Parallel Trading

What is grey market and what are grey market sellers? To begin with, and for a clearer understanding, the term “grey market” should be differentiated from the “black market”, and the “grey economy”. Very often, a lot of people deem them as the same, or misinterpret these terms. So how are they different from each other?

In the grey market, the selling of legal commodities or goods is done through a distribution channel that is also legal. However, this so-called selling avenue is not recognized by the original manufacturer to distribute their merchandise.

The black market, on the other hand, is when prohibited or legally restricted goods and products are sold. Despite the restrictions, there is selling or trade in this market.

Whereas the grey economy refers to an economy wherein goods or products are not monitored or taxed by the government, in whatever form it may be. This type of economy is very informal.

The “grey market”, or also spelled as “gray market” refer to the same concept. How is it defined?

What Is Grey Market? A Fundamental Definition

In the grey market, goods and products are sold via an unauthorized distribution channel, or through means outside of the designated selling portals of the original manufacturer. In other words, products are sold and imported in the grey market by unauthorized dealers, or those that are not recognized by the manufacturer. While this selling activity is not illegal, it is nonetheless, unofficial.

Brands that are sold in the grey market, or the gray market are genuine, otherwise known as “grey goods”. Then again, this selling activity is done not through the means of authorized distribution channels or market dealers. These unauthorized distributors or channels in fact sell the grey goods in unauthorized sales territories, and at lower prices compared to those imposed by recognized markets and dealers.

The grey market (gray market) is called in another way as the “parallel market”. In that, it is thus (a parallel market) for the goods and products that are sold in another distribution channel (which is not authorized by the manufacturer). This system provides two avenues for selling merchandise, and they are done so with different prices.

It is important that the “grey market” is not to be confused with the “black market”, or else, “grey economy. The most crucial factor to note here is that the merchandise, or the goods and products are legal and grey goods. The market deals for them is that they are sold by unauthorized dealers that have not been permitted by the manufacturer to sell them.

For the most part, these unauthorized dealers are in the form of small companies or individual distributors. It is these illegal distribution channels that comprise the gray market that sells the legal goods, although they are not authorized by the manufacturer. What makes these illegal dealers sell in the gray market is that because the selling rates are low than those offered by authorized dealers. Likewise, the products may be sold in a country wherein they are not available.

What Are The Types Of Grey Market?

There are different types of gray market, and they are the following:

  • The original market– this is where the products are sold through unauthorized selling channels. The products that are dealt here tend to be new. This market typically offers deals for new and original merchandise.
  • The green market- this is where used grey goods are sold, although it can be tricky to distinguish between new and used products.
  • The dark market– this is the third type of gray market where clandestine trading of commodities are carried out, such as crude oil.

This is the basic and fundamental definition of the grey market. But why do grey markets exist? What are the reasons why they are created? How do gray markets affect the manufacturer, the market, and the industry? What are its pros and cons, and how can loss be prevented in this trade system?

Why Do Grey Markets Exist

The following are the reasons why grey markets are created. These markets generally gain advantages because of:

  • Lower prices than the competition. Normally, manufacturers have their goods sold by very large distributors in huge bulks because they want to increase their sales. Consequently, selling competition arises amongst these authorized large distributors. To be able to sell their product goods, they therefore resort to means of slashing their product rates by selling them at cheaper prices, or by offering discounts. When doing so, however, they reduce their profit.
  • Difference of prices in different countries. Depending on the product demand, manufacturers sell their goods at different prices in different countries, which is one of their strategies for maximizing their profits. Grey marketers are aware of this, so they purchase the products at a lower cost from the country where they got them from, and at the same time sell them at a cheaper price in the host country. The same product is then sold at different prices in one country, or the host country.
  • Prohibited distribution. There are manufacturers that block certain distributors from selling their products, but these distributors would still want to do otherwise. Although the manufacturer prohibits them, these dealers want to sell the former’s products, and so they buy these goods from the grey market. In the grey market, blocked distributers purchase goods at a lower cost than that imposed by manufacturers. This system entails buying goods at a lower rate, and selling them through illegal distribution channels.
  • Targets for sales. Too often, manufacturers enforce high sales targets to their sales teams and their employees, and this tends to create sales pressure on these people. As a consequence- in order to meet their sales targets- these employees sell the goods in grey markets. Through this process, the buying and selling of merchandise in the grey market is collaborated by a sound business.
  • High cost of a product. The selling price of a premier product is usually high, and a lot of times, it is overpriced. Sometimes, it is costlier than how its competitors would sell them for. To balance their sales, and to keep the buying and selling of their goods, companies would sell their products in the grey market.

What Are The Effects of the Grey Market in Business?

The effects of the grey market to the business of a manufacturer, the industry, and the economy are actually adverse, and they are the following:

It hampers profitability. Goods are sold at lower prices in the grey market than what the manufacturer has decided. Prices set by the company is apt to be dependent on the calculation of their profits. When their products are sold in the grey market (at a cheaper cost), it would reduce their profits.

It can impact the reputation of a brand. Commodities sold in the grey market are not guaranteed or backed by the manufacturing company. If, in any way, the performance or usability of a product falls below standard, it will discredit the name of the brand.

It cannot guarantee the merchandise. It is not that easy to trust the grey market. The buyer can never be sure whether the commodity he or she buys in the said market is originally new or used. It can be difficult to differentiate one from the other in this aspect.

It sets confusing and multiple prices for a product. Customers can become confused because of the price difference of particular products sold in parallel marketing. Whereas authorized dealers sell these legal and original products at higher prices, grey marketers do so at lower rates. A single merchandise can therefore have different prices than those imposed by manufacturers.

It creates loss to the government. Tax charges are not imposed on grey goods, wherein they should normally be applied in the buying and selling process. Increased transactions in the gray market therefore lead to loss in the government.

What Are The Pros and Cons Of The Grey Market?

There are a few advantages on the part of the customers when they trade in the grey market. What are these benefits?

  • Customers can buy products at lower costs than market price.
  • Customers are able to buy commodities that may not be available in their country because they are sold in the grey market.

The disadvantages of customers trading in the grey market, are nevertheless more numerous, and they outweigh the benefits. They are:

  • The market goods availed of from the grey market do not come with a guarantee or warranty from the manufacturing company.
  • Grey goods may not be trusted because customers can never be too sure if they are buying new and original ones, or used. It can be tricky to distinguish one from the other.
  • Customers cannot avail of after-sales services from the manufacturing company if they buy grey market goods.
  • Customers may not be able to buy original and high quality products because it can be hard to differentiate them from bogus or replica products sold in the grey market.
  • Products sold in the grey market may not be made according to the intended audience.

What about from the point of view of the manufacturing companies? The grey market gives them a few advantages, and they are:

  • The sales of companies can be boosted if they distribute their goods in the grey market, especially if they sell them at exorbitant prices in the legitimate market.
  • Sales teams and employees can reach their sales targets by having their merchandise sold at lower rates in the grey market.

What about the disadvantages of the grey market to companies and everyone? They are:

  • It reduces the profits of manufacturing companies and the industry.
  • The brand image and reputation of a company can be discredited by counterfeits of their products that are dispensed via the grey market.
  • It causes a loss to the government because grey market goods are sold without taxes.
  • Parallel marketing results to multiple prices of particular products.
  • Products sold in the gray market cannot be guaranteed by the company.
  • Business relationships as well as client confidence may be put to risk because of the distribution of their commodities in the gray market.
  • The pertinent market in the industry is affected because of increased transactions in the grey market. It has adverse effects to the economy and the industry turnover.
  • Customers may be dismayed or will find the company uncredible because the products sold under their name in the grey market may not be of good quality.
  • The distribution channels of the grey market are unauthorized, and products sold through them may be unreliable.
  • Based on all the disadvantages stated above, a huge loss is incurred by the company, the industry, and the government because of parallel marketing. It can be for the long-term, too because it can discredit the reputation and brand image of a company- and this can result to a costlier damage than monetary losses and gains.

There are means and ways that companies can apply to avoid these losses, and to remedy the problems that arise in their market.