Competing with Gray Markets

This is an MIT Sloan Management Review article. In recent years, gray markets--in which a firm's products are sold or resold through unauthorized dealers--have become ubiquitous. They exist for tangible products (lumber and electronic components) and intangibles (broadcast signals, IPOs); for massive goods (automobiles and heavy construction equipment) and for light, easily shipped products (watches and cosmetics); for the mundane (health and beauty aids) and the life saving (prescription drugs). Gray markets aren't going away soon. Although they ebb and flow as exchange rates, price differentials, and supply conditions change, surveys confirm the increasing incidence and scope of gray markets. In many situations, their sales outstrip authorized sales. An inability to compete with gray markets can wreak havoc on firms and industries. Unfortunately, because it is so hard to get data on gray market activity and what firms are doing to deal with it, there is little published guidance to help managers. The sale of legitimate products in the wrong place or through the wrong channel poses unique problems to companies. But there are unique solutions that can successfully manage them. Using several examples that show the scope and complexity of the gray market problem, the authors explain how managers can apply a framework based on sensing, speed, and severity to manage it. They also point out scenarios in which gray markets are actually helpful and should be tolerated.

• Competitive strategy
• Marketing strategy
• Corporate strategy