The interaction between manufacturer encroachment and gray market

Abstract

With the rapid development of retail platforms, many manufacturers use retail platforms to encroach into the retail market (i.e., a type manufacturer encroachment) and gray market is increasingly prevalent in various industries. This paper considers a manufacturer who directly sells product 1 in the domestic market and sells product 2 through an incumbent retailer in the overseas market and a gray marketer can divert product 1 across markets without authorized (we call it gray market). In this paper, we examine the interaction between manufacturer encroachment and gray market. We find that when the domestic price of product 1 is sufficiently low, the gray marketer can successfully enter the overseas market without and with encroachment. Second, regardless of whether there is a gray market threat, the manufacturer has an incentive to encroach through retail platform when the commission rate is low. Moreover, the manufacturer’s incentive to encroach varies with the domestic price of product 1 and gray market threat. Finally, manufacturer encroachment can reduce the scale of the gray market and even eliminate the gray market under certain conditions. The gray marketer always suffers from manufacturer encroachment while the retailer can benefit from manufacturer encroachment.