Gray market speculation: Analyzing retailer behavior and manufacturer strategies in the context of strategic consumer behavior

Abstract

The paper constructs a supply chain model consisting of a manufacturer and an authorized retailer and analyzes the motivation of the authorized retailer to engage (directly or indirectly) in gray market speculation under the premise of two types of consumers in the market: the myopic and the strategic. Furthermore, the model is extended in two aspects: the delayed availability of gray market products and the damage of gray market products on the manufacturer’s reputation. The analysis reveals the following conclusions: (1) The percentage of different types of consumers is the critical factor influencing the authorized retailer’s decision to participate in gray market speculation. When the market has a higher proportion of myopic consumers, the authorized retailer is more inclined to participate in gray market speculation and is willing to participate directly in gray market speculation rather than indirectly through a third party distributor. (2) After considering the time discount of the gray market product, the authorized retailer is more likely to choose speculative behavior. In particular, if consumers have more patience in waiting for gray market products, the likelihood of the existence of the gray market decreases, which is counterintuitive. (3) If gray market products have minimal impact on the manufacturer’s reputation, the manufacturer may encourage the existence of the gray market. Conversely, if the reputation is severely damaged by the presence of the gray market, the manufacturer needs to use a combination of wholesale pricing and regulatory efforts to manage the gray market.