Gray Marketing: Does It Hurt the Manufacturers?

It is generally believed that the existence of gray channels hurts authorized retailers because gray marketers often free-ride on the marketing activities performed by authorized retailers. However, the effect on manufacturers' profits is still rather vague. This paper sets up a two-stage sub-game perfect equilibrium model to examine the effects of gray goods on authorized retailers and manufacturers. It is found that manufacturers who are against parallel importation are likely to be those whose product has a low gray good penetration ratio, low price elasticity of demand, high cross-price elasticity of demand, or a high demand convexity.