Pricing and unauthorized channel strategies for a global manufacturer considering import taxes

Abstract

Global manufacturers face a pricing dilemma: setting higher prices in foreign markets to offset import taxes may lead to unauthorized cross-border channels; while narrowing price differences between domestic and foreign markets to block these channels increases the tax burden. To address this challenge, we develop Stackelberg game models to investigate the pricing and unauthorized channel strategy for a global manufacturer. Our findings indicate that an unauthorized channel can benefit the manufacturer by providing a means to avoid import taxes and potentially increasing overall demand in the foreign market. When the impact of an unauthorized channel on brand reputation is low, the manufacturer should widen the price difference between domestic and foreign markets to allow it. Conversely, when facing high brand reputation risks, the manufacturer must consider the import tax in the foreign market. If the import tax is high, the manufacturer should narrow the price difference between domestic and foreign markets to block the unauthorized channel; otherwise, simply ignore the threat of the unauthorized channel and maintain regular prices. We also examine the effects of consumer acceptance of gray market products and import tax incentives for cross-border e-commerce. We find that an increase in the two factors enhances the manufacturer’s inclination to allow an unauthorized channel. Our results remain robust across varying import tax structures, production costs, consumer valuations, and exchange rates, as well as when there are differences in market potential and consumer valuation between domestic or foreign markets.