What Is The Gray Market?
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What is the Gray Market?

Pursuing MBA
The gray market, while not illegal like the black market, involves the sale of goods through means other than what was intended or approved by the original maker of a product. A private person or business purchases the good at retail, wholesale, or a discounted price, and attempts to resell it legally at a higher price. The list of things that can be sold on the gray market is endless, but popular items include electronics, photographic equipment, cigarettes, DVDs and wine. The term gray market can also refer to the securities market, where it defines the buying and selling of securities that will be issued at some point in the future.

The gray market is extremely hard to track, because once a good is sold to an unauthorized dealer, the manufacturer has no way of tracking the sale of the goods. The gray market exists just about everywhere. In the suburbs, one prime example is the snack stand at a high school football game. In an effort to raise money, the student council may purchase soda, hot dogs and chips at a wholesale warehouse store like Costco, then sell them for a profit at the game. Another good example of the gray market is when someone buys goods at a garage sale or outlet store and resells them on eBay at a higher price.

Under some circumstances, different countries have different markets for different goods. When a person takes advantage of the disparity in market prices of a particular good, it is called arbitrage. An arbitrageur takes advantage of this disparity by buying a good in a country where it is significantly cheaper, then reselling it legally in another country where they can demand a higher price.

One drawback of the gray market is that many manufacturers will not honor warranties on electronics purchased through it. Because the good is not purchased through “authorized” channels, manufacturers refuse to spend the money to honor the warranty. One of the ways that manufacturers identify items resold on the gray market is by putting different model numbers on the same product in different countries. When someone calls for warranty issues, they can identify whether their product was sold in the correct country. The warranty cannot usually be enforced, because it was sold through a third party in a different country.

Authorized agents and sellers are most often financially affected by the gray market, because they lose business to unauthorized sellers. Local laws can help or hurt the gray market. In some cases, food is difficult to resell because local laws dictate packaging, so what is legal in one state or country may not be in another. In an effort to curb the resale of DVDs and DVD players, DVD region codes are written onto the disc for the specific geographical area it is supposed to be sold in. Only the DVD players intended for sale in that area can play these DVDs.

Low tariffs and free trade are beneficial to the gray market, but manufacturers and big business lobby constantly to enact laws to make it difficult for gray marketeers to do business. This, coupled with advances in technology, make the most popular goods difficult to resell on the gray market.