Impacts of power dynamics and gray markets on supply chains

Abstract

We investigate the impact of power dynamics and gray markets when a premium-brand manufacturer sells in both a developed country's market and a developing country's market and a local-brand manufacturer only sells in a developing country's market. We consider two types of power structures between the manufacturers, that is, the dominant manufacturer Stackelberg (DMS) and manufacturer Nash game (MN). Under each power structure, we characterize the condition under which a gray market emerges in equilibrium. We show that the premium-brand manufacturer is always worse off, while the local-brand manufacturer is better off when a gray market emerges. We then focus on comparing the effects of the power structures on manufacturers when a gray market arises. We show that both the premium-brand and local-brand manufacturers obtain higher profits under DMS than under MN as a result of an interaction between the competitions in the two markets. We also demonstrate how the manufacturers' profit gains under DMS relative to those under MN are affected by key parameters, such as consumers' perceived values of the gray market's and the local-brand manufacturer's products. The key implication of our paper is that manufacturers can be better off by entering an agreement to switch from an MN to a DMS power structure when leading manufacturers are combating a gray market.