Blockchain adoption and gray markets in a global supply chain

Abstract

Manufacturers have been troubled by gray markets for a long time in global supply chains. The development of blockchain technology elicits a new idea to tackle the gray market issue. This paper investigates two-way impacts of gray markets and blockchain adoption in a global supply chain. We also construct Stackelberg games to explore equilibrium strategies of the manufacturer and the gray marketer under different power structures. We find that: (i) no matter whether blockchain is adopted, the gray marketer's entry can induce a lower/higher retail price for the manufacturer in the domestic/foreign market. This reflects that blockchain adoption cannot alter the impacts of the gray market on the manufacturer's pricing decisions. (ii) The manufacturer's blockchain adoption can either promote or prevent the gray marketer's entry, depending on the manufacturer's extra cost in the foreign market and the real product quality. Moreover, the authorized channel can benefit from the manufacturer's blockchain adoption even if it promotes the gray marketer's entry. (iii) When the manufacturer is the first-mover in the game, it will adopt blockchain if the real product quality is high in equilibrium. If the manufacturer loses its first-mover advantage, it is interesting that when the real product quality becomes lower, the manufacturer may still adopt blockchain. Finally, we demonstrate the robustness of our main results by incorporating the impact of the gray market on the domestic market and the marginal cost of blockchain adoption. We further find that the gray marketer's entry may promote consumer surplus in the foreign market.