Gray marketing phenomena in global supply chains: Can pricing strategies help?

Abstract

Nowadays, gray marketing is a critical issue in global supply chain management. In this paper, we analytically study how authorized incumbent retailers can use pricing to prevent unauthorized parties from entering and establishing gray markets. We consider the case in which an authorized retailer can choose from three pricing strategies, namely: myopic, proactive, and reactive. The authorized incumbent retailer in the high-end market faces consumers with higher willingness to pay (WTP). We investigate the entry conditions for an entrant retailer to establish a gray market under the three pricing strategies and provide a succinct analytical framework to segment the high-end market explicitly in terms of entry conditions. We identify the deterrence outcomes in each segmented market, and determine when each pricing strategy is optimal in the segmented markets. We theoretically reveal that whether deterring or allowing unauthorized entry is optimal depends on the entrant retailer’s purchasing cost and the degree of consumers’ WTP differentiation between the authorized and unauthorized products. When consumers have a high WTP in the high-end market and the incumbent retailer has a high purchasing cost, the entrant retailer is more likely to enter the high-end market. Although the reactive pricing strategy is the most flexible one, followed by the proactive and myopic pricing strategies, the adoption of a relatively flexible pricing strategy cannot always completely deter unauthorized entry. Counterintuitively, ignoring the threat of unauthorized entry by adopting a myopic pricing strategy is the optimal choice for the incumbent authorized retailer, followed by the proactive and reactive pricing strategies. In addition, our results highlight that the choice to adopt a more flexible pricing strategy to deter unauthorized entry may lead to a “winner’s curse” instead of a “winner-takes-all” outcome. Moreover, allowing unauthorized entry into the supply chain is by no means a “win–win” game. To show the robustness of findings, various extended analyses are conducted.