Research On Impact Of Gray Market Entry On Pricing And Service Decisions Of Incumbent Firms

Gray markets are an unauthorized distribution channel that dealers sell the genuine branded products without the permission of the brand owner.Owing to the brand owner's pricing discrimination strategy(same product in different markets have different prices),parallel import(one category of gray markets)occurs when unauthorized dealers are motivated to import the product from the low-priced market then transfer and resell it in the high-priced market.Recent technological advances in E-commerce and logistics processing technology have enabled gray marketing as major mode of cross-border sales on a massive scale,owing to some cross-region sales behavior is not authorized by the brand,the rise of cross-border E-commerce(such as Kaola.com,JD Worldwide,Tmall.Hk,VIP international and so on)plays a catalyst role for the development of gray markets.Gray markets may not only intensify competition among similar products and erode brand value,but also lower market share and profits of domestic authorized firms.For the entry of gray markets,authorized incumbents have adopted various strategies including tolerance of its entry,predictably,or flexibly impediment of its emergence.In addition,authorized incumbents also can take the joint strategy(including pricing and service)to hinder the entry of gray market.However,to the best of our knowledge,existing literature is not in-depth enough to study the problem that how authorized incumbents to price the product flexibly in different market conditions to reflect the optimal decision.Interestingly and surprisingly,studies that analyze the interaction effect of pricing strategy and after-sale service to compete with gray market is rarely founded.Based on the above background and the deficiencies of present literature,this paper utilizes the theory of consumer behavior,the theory of game theory and the theory of optimization,and the hybrid method of qualitative and quantitative analysis from the view of authorized incumbents.In addition,considering the conditions of consumers' preferences for different channel products in the supply chain,we study how authorized incumbents to deal with the gray market problem by taking different pricing strategies and providing different quality level after-sales services.The specific contents of this paper are as follows:1.Consider a duopoly competition problem where two retailers are authorized to sell the same product in two separate markets(i.e.,the low-level market and the high-level market),the retailer in low-level market is tempted to enter into the high-level market and sell products there without authorization.Then a Stackelberg game is constructed where the authorized retailer is the game leader and the unauthorized retailer acts as a follower.On this basis,we explore the optimal decision of incumbent authorized retailer in the presence and without the presence of gray market.What's more,we compare the two cases and analyze the impact of the existence of gray market on the incumbent authorized retailer.2.In view of the negative effects of gray market,incumbent authorized firms can adopt pricing strategy to compete with it.According to the practice of existing firms,this paper summarizes and constructs three pricing strategies,i.e.,myopic pricing,forward-looking pricing and dynamic pricing.Based on the above analysis,we study the conditions that unauthorized entrant start up a gray market under different pricing strategies and the influence of the change of the market conditions on the existence of the gray market.Then we divide the entry area and carry out the corresponding comparative analysis.Findings of this work may provide some managerial insights for the incumbent authorized retailer on how to deter gray marketing via pricing strategy.3.Authorized incumbent can also adopt a joint strategy of pricing and servicing to cope with the challenge from gray market.By constructing the demand model with after-sales service,we study respectively the optimal decision of pricing and service level of incumbent authorized retailer under the two cases of providing basic after-sales service and high quality after-sales service.Through the comparative analysis of two cases,we explore the impacts of different market conditions on the generation of gray market and the profit of authorized incumbent and unauthorized entrant.In addition,this paper provides reference value for authorized incumbent how to provide the optimal pricing and after-sales service quality level.