Grey Marketing And Parallel Imports Economics Essay

Parallel trade or Grey market is a thriving business that is growing in most underdeveloped and developing countries today. This paper looks into the issues surrounding the grey market such as its impact on the people and the manufacturers along with the advantages and disadvantages of such a market thriving within a locality. Additionally the research also looks into the future prospects of parallel trade along with the primary reasons behind its existence.

Introduction

Grey marketing or parallel importing basically refers to the distribution or selling of products and goods which are trademarked to the customers without the express approval or knowledge of the original manufacturers consent through unauthorized distribution channels. These kind of markets are not classified as illegal markets as they products and goods are not physically stolen but are actually original pieces. The only issue is that the way the products are being sold is not actually approved of by the manufacturers. These goods and products can be termed to be illegal only if they violate either the product regulations or the licensing contract of the original manufacturer.

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The main reason for the existence of such a market is the price differential that exists in two different markets. For example, the higher resale potential of a product in a different market is what drives the existence of such a market. The price differential between two markets give an opportunity for the products to be bought in a place where it is relatively cheaper and sold at a considerably higher prices where the product is not available (Engardio et al., 1988). There are certain other factors which lead to gray marketing, such as:

1. When the genuine goods have set a performance, price channel, and market recognition that ensure demand and minimize consumer education.

2. A lack of focus by the authorized channel in the markets. A particular product may not be available in a market which forces the consumers to look for alternative ways to acquire the product. People who are involved in gray marketing may see the imbalance of supply and demand as an opportunity to make profits.

3. A significant change in the behavior of the consumers which may lead to an increased demand for lower priced products which may be accelerated by the governmental policies (Mathur, 1995).

In an international context however, it tends to have a unexpected impact on the branding and brand equity. However, it does lead to a increase in the market share of the products and also aids in penetrating a closed market (Mitchell, 1998). This type of markets provides access to parallel trades wherein products that are protected by a patent or trademark are generally purchased legally from the retailer and which is then exported to another country without the authorization of the local manufacturer of the original product (Maskus, 2000b). Parallel imports mainly occur due to international price differences which could in turn be caused due to price discrimination, national differences in governmental price controls or vertical pricing restraints. One of the main areas in which parallel imports are heatedly debated is in the pharmaceutical sector. Parallel imports can be seen all over the world among the European Union countries the United States etc.

Losses due to grey marketing

Grey marketing and parallel imports also can be seen in the service sectors such as Telecom sectors, Health industry etc. In fact according to (Philip, 2005), the Indian telecom sector has incurred losses amounting to Rupees 458 crores since 1998. According to data compiled by the department, over 60 per cent of the revenue losses have been reported from Delhi and Maharashtra, with violations to the tune of Rs 290 crores. Grey market frauds of about Rs 60 crores had been registered in Andhra Pradesh, followed by Tamil Nadu, Karnataka and Gujarat at Rs 36 crores, Rs 35 crores and Rs 15 crores respectively. These six states also accounted for over 95 per cent of revenue losses through illegal telecom set-ups, the Dept of Telecom added.

Parallel trade can be extensively seen in the cell phone market. It all started with the emergence os the GSM international standard in 1990 after which the phones could be used anywhere in the planet prompting an increase in the demand for cell phones in markets where cell phone manufacturers still had not ventured into which in turn increased the size of the parallel market. According to (Sugden, 2009), about 30% of the cell phones traded are sold through a grey market and this statistics continue to be on the rise. This is about 500,000 cell phones which are bought and sold through unofficial channels every single day. An example of this is in the case of Apple iphones. These were released in select markets only. However, due to their popularity, they were in huge demand in other countries, where the consumers had no choice but to either procure it from a grey market trader or wait for the company to officially launch their products in that country.

Theory of Parallel imports

Parallel imports affect a wide range of industries, spreading from traditional luxury and brand- name consumer products (wines, cameras, and watches) to industrial products. Industry sources estimate that parallel imports account for 10% of IBM¿½s PC sales, 20% of Sharp¿½s copier sales, and 20% to 30% of the world cosmetics and fragrances sales (Ahmadi and Yang, 1995). Belgium, for example, despite the fact that it has no auto mobile industry is a major car exporter in Europe¿½more than 25,000 cars some years. This export success story is because cars are cheaper in Belgium than in nearby countries, due to tax differences (Weigand 1991).

Another trend relating to parallel imports, is that this has evolved from basically a U.S. problem in the 1980¿½s into a world -wide phenomenon in the 90¿½s (Ahmadi and Yang, 1995). When the U.S. dollar was strong, during the 1981-1986 period, the number of cars purchased in Europe by U.S. tourists grew 2,000%. In 1986 the total value of products distributed through unauthorized channels in the U.S. reached a peak of $10 billion (Palia and Keown, 1991). This direction was reversed in subsequent years as other parts of the world, especially Asia and Europe, experienced rapid appreciation in their currencies and a corresponding surge of parallel imports (Ahmadi and Yang, 1995). A 1991 survey of U. S. exporters to Asia showed that 41% of 141 respondents reported having problems with parallel imports in the past five years (Palia and Keown 1991). In 1990 pharmaceutical parallel imports in the European Community stood at $500 million (Lynn 1991, quoted in Ahmadi and Yang, 1995, p. 3). In an increasingly integrated world, the annual growth rate of parallel imports has been estimated to be 22%, and this is expected to rise as new trade agreements, like NAFTA and GATT, further lower trade barriers across nations.

There are essentially two reasons why parallel imports occur in international markets. The parallel import or ¿½grey market¿½ exists because foreign manufacturers practice price discrimination among countries and grey market sellers arbitrage these price differences. Second, parallel importers are more efficient than authorized sellers because parallel imports compete with the goods of authorized sellers, in turn leading to lower prices that are beneficial to consumers.

Those favoring parallel imports argue that international price discrimination restrict competition to the disadvantage of consumers in countries having higher prices. They say that parallel imports foster competition and efficiency, thus benefiting consumers in importing countries. Some researchers argue that, while it is clear that active parallel imports cannot exist without price differentials between countries, the source of these differentials is not quite so apparent (Weigand, 1991). Depending on the type of goods involved and the character of the market for the product, price differentials can be the result of a variety of factors, ranging from honest enterprise, such as a diverter who takes advantage of favorable foreign currency exchange rates and engages in a sort of product arbitrage, to a manufacturer who attempts to discriminate by price in different (usually foreign) markets.

Therefore, in regard of the process of parallel imports, there is no end to the imaginative ways used to bring parallel imports to market. Four methods, however, represent the bulk of market imports and are focus of much of the economic and legal attention. First, are those products made overseas by for example American firms (see Figure 1). These foreign units may be subsidiaries, joint venture companies, or some other entity which have a commonality of interests with the American company. This foreign affiliate may sell to nearby authorized distributors, for example, a French firm. Somewhere in the authorized channel, however, distribution control is lost and the product gets into an unauthorized channel and some of it is exported back to the United States. Here it competes with identical domestically produced products.

A second method (depicted by Figure 2) of parallel importing is when a foreign manufacturer (e.g. German) licenses a company to be the exclusive importer of a product bearing a foreign name or trademark.

Impact of Parallel Trade

There are a number of effects of all of this parallel importing activity. Here, the predicaments and opportunities created by these parallel distribution channels are discussed in more detail.

First, consumers may be prejudiced against buying products which have been parallel imported because sometimes they cannot be properly serviced or maintained. They also may be worried that the so-called technical requirements for certain products may not met by grey importers. It needs to be made clear that parallel imports are not counterfeits but genuine products that are often sold at a lower price to consumers than these distributed by regular channels (Ahmadi and Yang, 1995). However, these may not necessarily have a lower profit margin because they can free ride on the promotional efforts of authorized dealers.

Consequently parallel imports may undermine authorized dealers¿½ selling efforts. For example, by discouraging their investment in a sales-force or shelf-space.

Advantages and Disadvantages of parallel importing

Parallel imports promote free trade, encourage healthy competition and act as price levelers. Non application of parallel importation may result in complete control in distribution channels thereby perpetuating monopolies (Ashwini, 2006). Hence application is vital to minimize monopolistic effect of the policies of the multinational enterprises who try to control distribution channels. The biggest beneficiaries of parallel imports are the ultimate consumers who have the advantage of buying genuine goods produced by another licensee, offered under an authentic mark at a much lower rate.

However, parallel import often raises serious issues of unfair competition and piggy backing ¿½ which refers to the attempt by the parallel importer to encash the goodwill fostered by the owner to sell their grey products. Concerns of quality of the goods also arise when the gray goods have been manufactured for a different market comprising different tastes and demands. The raw materials used may also be from geographically different areas directly affecting the consumer health. Furthermore, the corresponding guarantees and after sales maintenance services attached with the goods may be different for the various regions.

Future of Parallel Imports

The trend towards the globalization of markets, which is being facilitated by the development of a global communication system, envisages the end to domestic territoriality because of global competition. Because of the speed of new technologies and communication developments, parallel importation may be a short-term phenomenon.

The impacts of globalization on parallel importation are two folds. First, as trade barriers between nations decrease, it will become more difficult to implement price discrimination policies based on country boundaries. Implicitly, parallel traders are therefore likely to gradually disappear, as there will be fewer opportunities for arbitrage. The issue of parallel importation may therefore become less significant as globalization continues.

Secondly, traditionally, under international law, nations have asserted sovereignty based upon the territory that they legally control. Advances in electronic communications, including the Internet, however, have begun to change this. This development suggests that, rather than sovereignty based on territory, sovereignty will be based on information flows or economic spheres of influence will become the norm in cyberspace. This hypothesized shift will however, require a re-evaluation of present legal doctrines, which in turn may ¿½re-establish parallel imports legality.¿½

Nevertheless, when the world economy becomes far more globally integrated, which is likely in a digitally based economy, it becomes necessary to harmonize the different transactional rules between nations. This means policy co-ordination among different governments will be a critical step in achieving this (Rothnie, 1993).

Measures to combat parallel trade

Grey markets are not looked down upon by many industries primarily because they are benefitted by the increase of exposure of their products in new economies. Therefore parallel trade is a sensitive issue and this issue is something that can be most effectively combated against by the company¿½s themselves. There are certain safeguards that an organization can take to track products final destinations, such as:

1. Volume Control: One way to control the grey market distribution is to keep an eye on the supply chain of a product and track its normal volumes on a monthly basis. Furthermore, this data should be cross checked with the import and export records which are kept by the countries trade organizations (Palia, 1991).

2. Auditing: Proper auditing would ensure that a company can identify whether or not its products are being diverted from one country to another.

3. Different Packaging: This technique is already being used by some manufacturers. Utilizing this technique may lead to an increase in the overhead costs of manufacturing the product but the ability to segregate the markets through a differentiated product or with a variable packaging is a viable answer to prevent diversion and grey market with its own products.

4. RFID: Using radio frequency identification a risk tracking system can be adopted which would be inexpensive and such a system would be able to flag a product by its code if it is diverted.

5. Government legislations: Governments can strengthen up their trademark and copyright acts which aids in preventing the flow of products which are trademarked. Stricter laws have to be formalized and these laws also have to be properly enforced to ensure that grey market activity is curtailed if not stopped completely (Lewin, 1986).

Conclusions

Grey market is a thriving world from all the evidence presented so far. With globalization and advancement in the technology and reduction in trade barriers, parallel import market has steadily been growing especially in the developing countries where demand far outpaces supply. So far this has been a small sized market however it has grown significantly, in the past decade or so, due to decrease in the transaction costs around the world, penetration of internet leading to cross border commerce and products harmonization.

There are clear advantages to the end customers due to the presence of parallel imports primarily due to the fact that it opens up the avenue for them to a large international market. Therefore the people are not complaining about the presence of such a market in their midst. However, the main entities who are hurt due to the presence of such a market are the government and manufacturers both of them losing a large amount in revenues that is actually supposed to go to them from taxes and profit margins respectively. Therefore the impact on the consumers is negligible except in cases when there vis a fault with the product and the customer cannot have it checked or replaced since he/she bought it out of warranty. Overall, it seems to be benefiting people more than harming them.

Furthermore, I believe that the global grey market scenario will reduce in its size by itself primarily due to increasing globalization. With the spread of internet and the presence of global marketing company¿½s are making products that can be used anywhere in the world. Therefore the risk of inadvertently buying a product that would not be functional in a particular geographical place in decreasing day by day. Moreover, with couriers like DHL and UPS, it has become a fairly routine habit to purchase products or source them from another country. Therefore, its impact will slowly be eroded because trade barriers will become non existent and people are gaining more knowledge day by day and therefore are becoming self aware of all the possibilities.

Besides this even organizations tend to keep quiet about their products being sold at places not designated by them as it increases their exposure in new markets.

Recommendations

The organizations can take a few steps if they want to prevent such grey markets by:

¿½ Ensuring that the current regulations are being adhered to strictly throughout the supply chain.

¿½ Establishing a tamper proof packaging solution which would be hard to duplicate and which would be easily identifiable to a consumer indicating its legal status.

The governments can take the following steps to safeguard against thriving of such a market:

¿½ The government must formally consult with all stakeholders, i.e. manufacturers, in order to get their opinion on the impact of such a market on them.

¿½ They must encourage and motivate its citizens against purchasing products through this market. The harmful effects of such a decision should be spread about in the community especially in the case of grey market related to pharmaceuticals.

Parallel traders must also:

¿½ Cooperate in putting an end to the practice of de-boxing, and move instead to ¿½over-box¿½ the un-tampered product to ensure integrity of the medicine.