Manufacturer’s Price and Service Strategy Under Gray Market Considering Government Supervision


Author

Xin Yin
School of Economics and Business Administration, Chongqing University, 174 Shazhengjie, Chongqing, China

Bin Dan
School of Economics and Business Administration, Chongqing University, 174 Shazhengjie, Chongqing, China

Haiyue Zhang
School of Economics and Business Administration, Chongqing University, 174 Shazhengjie, Chongqing, China


Content

This paper considers a supply chain system consisting of a manufacturer with her authorized retailers, an unauthorized intermediary and the regional government. Aim at the problem of the manufacturer’s price decision and service strategy in two markets under gray market, the demand function influenced by the consumer acceptance of gray goods and the manufacturer and the unauthorized intermediary’s profit model are established. By analyzing and discussing the effects of government supervision on manufacturer’s pricing decision and service strategy, this paper proposes the manufacturer’s optimal price and service strategy. The results show that if the government increases supervision the manufacturer will benefit while products demand and profits of the unauthorized intermediary will decrease. Thus, the government will achieve the target of combating gray market transaction. Besides, the manufacturer’s service level when the government does not provide any protection against the gray market is as same as the level when the government provides complete protection. The service level will be higher when the government provides incomplete protection. Furthermore the results are examined by numerical examples.

Keywords: gray market; supply chain; pricing decision; service strategy

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With the rapid development of economic globalization, enterprises’ strategies of managing supply chain has been changed (Beamon, 2008; Msimangira & Tesha, 2014), while the difference strategies multinational enterprises adopt in different countries will lead to gray market. Gray market is goods produced genuinely under protection of a trademark, patent, or copyright, placed into circulation in one market, and then imported into a second market without the authorisation of the local owner of the intellectual property right (Maskus, 2000). With the rapid development of economic globalization, the trade of gray market increases prominently, which cannot be ignored. It has been estimated that the losses of U.S. from the gray market amount to $ 63 billion every year. The problem is more common in other counties (Kodak, 2011). The so-called “branded products” and “gray products” in the mobile phone market of mainland China exist because of the gray market. According to survey results published by the electronic digital industry consultancy iSuppli, the total shipments of the world’s major handset makers to China reached 840 million units, while the gray shipments of unauthorized intermediaries occupied 220 million units (iSuppli, 2013) . Gray market will decrease the company’s profit level. Although the gray products are authentic, their after-sales service cannot be guaranteed. In the long term, it will decrease customer loyalty and satisfaction and even damage the company’s reputation severely. Thus, it is of practical significance to study how the company develops strategies to fight against the gray market.

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There are a manufacturer (denoted by M, called she) and an unauthorized intermediary (denoted by A, called he) in the market, and the government (called it) supervises the unauthorized intermediary. The manufacturer sells her branded products through her authorized retailers to consumers in regional market 2 at the price of pm . The unauthorized intermediary sells gray goods shipping form regional market 1 with a lower price to the consumers in regional market 2, at the price of pa . The manufacturer provides after-sales service for consumers, we assume that the manufacturer’s service cost of providing service level s is s2 . The unauthorized intermediary doesn’t provide any after-sales service for consumers. Meanwhile, in order to simply the analysis, we assume that there aren’t other costs when the manufacturer selling branded products through her authorized retailers to consumers.

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The unauthorized intermediary selling gray goods will influence the manufacturer’s pricing decision of branded products, service level and profit level. And the government supervision policy will also make them different. By establishing the demand function influenced by the consumer acceptance of the gray goods and the profit models of the manufacturer and unauthorized intermediary, this paper analyzes and discusses the effects of the government supervision on the manufacturer’s pricing decision and service strategy. And the effects of the consumer acceptance of the gray goods on both the manufacturer and unauthorized intermediary are investigated. The results indicate that it’s better for the manufacturer if the manufacturer do not clear the unauthorized intermediary outside the market completely and allow the unauthorized intermediary to conduct gray market transactions properly. The results also show that it is benefit for the manufacturer if the government increases supervision, while both the products demand and profits of the unauthorized intermediary will decrease. Thus, the government will achieve the target of combating gray market transaction. Besides, the manufacturer’s service level when the government does not provide any protection against the gray market is as same as the level when the government provides complete protection. The manufacturer’s service level will be higher when the government provides incomplete protection.

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About Author

Xin Yin was a Master of the School of Economics and Business Administration at Chongqing University, P. R. China. She received Master’s degree in Management in 2014. Her research interest is supply chain management.

Bin Dan is a Professor and an associate dean of the School of Economics and Business Administration at Chongqing University, P. R. China. He received Ph.D. degree in Engineering from Chongqing University in 1997. His research interests include logistics and supply chain management and e-commerce. His research has been published in International Journal of Production Economics, International Journal of Production Research, International Journal of Manufacturing Technology and Management, and International Journal of Service Technology and Management.

Haiyue Zhang is a PhD candidate of the School of Economics and Business Administration at Chongqing University, P. R. China. She received Bachelor’s degree in Management in 2014. Her research interests include logistics and supply chain management. Her research has been published in Journal of Applied Research and Technology.