Arbitrage in gray markets and its impact on supply chain decisions

Purpose The purpose of this paper is to investigate the impacts of different gray markets' structures on both supply chain decisions and associated profits. Design/methodology/approach Within the context of gray markets, using game theory approach in this paper, supply chains have been considered as assets of manufacturers, distributors and speculators, within which manufacturers sell products to distinctive markets either directly or through authorized distributors, while speculators buy products from a lower price market and then sell them in a higher price market. Our study has examined different decision variables within such a framework. Findings Considering a situation where one manufacturer sells its products either directly in one market (Market 1) or through its authorized distributor (Market 2), due to different products prices in both markets, results have shown that, when market elasticity is less than its critical value, a speculator can sell a gray market product arbitrage in market 2, whereas when the market elasticity is greater than its critical value, a speculator can sell a gray market product arbitrage in market 1. In addition, manufacturers-as leaders of Stackelberg game-are always the most profitable stakeholders within a gray market supply chain. Practical implications In this study, equilibrium results for each market have been obtained, optimal results have been compared, and accordingly, valuable insights have been developed. Such results would help managers to take better managerial decisions, as well as strategizing policies in gray markets. Originality/value In this paper, we have considered a gray market where both distributors and speculators exist and act as parallel channels. To the best of our knowledge, the extant literature focuses either on distributors or speculators, but never concurrently on both. In fact, the coexistence of one distributor and one speculator in a gray market will impact their own decisions, as well as both decisions and profits of other stakeholders, and hence, will exert an impact on the manufacturer side.

Automated summary

This study investigates the impacts of different gray markets' structures on supply chain decisions and profits using game theory. It reveals that manufacturers, as leaders in a Stackelberg game, are consistently the most profitable stakeholders in the gray market supply chain.