Grey market


Grey market

A grey market or gray market also known as parallel market[1] is the trade of a commodity through distribution channels which, while legal, are unofficial, unauthorized, or unintended by the original manufacturer. The term gray economy, however, refers to workers being paid under the table, without paying income taxes or contributing to such public services as Social Security and Medicare.[2] It is sometimes referred to as the underground economy or "hidden economy."

A black market is the trade of goods and services that are illegal in themselves and/or distributed through illegal channels, such as the selling of stolen goods, certain drugs or unregistered handguns. The two main types of grey market are imported manufactured goods that would normally be unavailable or more expensive in a certain country and unissued securities that are not yet traded in official markets. Sometimes the term dark market is used to describe secretive, unregulated (though often technically legal) trading in commodity futures, notably crude oil in 2008.[3] This can be considered a third type of "grey market" since it is legal, yet unregulated, and probably not intended or explicitly authorized by oil producers.

Contents

Description

Unlike black market goods, grey-market goods are legal. However, they are sold outside normal distribution channels by companies which may have no relationship with the producer of the goods. Frequently this form of parallel import occurs when the price of an item is significantly higher in one country than another. This situation commonly occurs with electronic equipment such as cameras. Entrepreneurs buy the product where it is available cheaply, often at retail but sometimes at wholesale, and import it legally to the target market. They then sell it at a price high enough to provide a profit but under the normal market price. International efforts to promote free trade, including reduced tariffs and harmonized national standards, facilitate this form of arbitrage whenever manufacturers attempt to preserve highly disparate pricing. Because of the nature of grey markets, it is difficult or impossible to track the precise numbers of grey-market sales. Grey-market goods are often new, but some grey market goods are used goods. A market in used goods is sometimes nicknamed a Green Market.

Importing certain legally restricted items such as prescription drugs or firearms would be categorized as black market, as would smuggling the goods into the target country to avoid import duties. A related concept is bootlegging, the smuggling or transport of highly regulated goods, especially alcoholic beverages. The term "bootlegging" is also often applied to the production or distribution of counterfeit or otherwise infringing goods. Grey markets can sometimes develop for select video game consoles and titles whose demand temporarily outstrips supply and the local shops run out of stock, this happens especially during the holiday season. Other popular items, such as dolls can also be affected. In such situations the grey market price may be considerably higher than the manufacturer's suggested retail price. Online auction sites such as eBay have contributed to the emergence of the video game grey market.

Responses

The parties most concerned with the grey market are usually the authorized agents or importers, or the retailers of the item in the target market. Often this is the national subsidiary of the manufacturer, or a related company. In response to the resultant damage to their profits and reputation, manufacturers and their official distribution chain will often seek to restrict the grey market. Such responses can breach competition law, particularly in the European Union. Manufacturers or their licensees often seek to enforce trademark or other intellectual-property rights against the grey market. Such rights may be exercised against the import, sale and/or advertisement of grey imports. In 2002, Levi Strauss, after a 4-year legal fight, prevented UK supermarket Tesco from selling grey market jeans.[4] However, such rights can be limited. Examples of such limitations include the first-sale doctrine in the United States and the doctrine of the exhaustion of rights in the European Union.

When grey-market products are advertised on Google, eBay or other legitimate web sites, it is possible to petition for removal of any advertisements that violate trademark or copyright laws. This can be done directly, without the involvement of legal professionals. eBay, for example, will remove listings of such products even in countries where their purchase and use is not against the law. Manufacturers may refuse to supply distributors and retailers (and with commercial products, customers) that trade in grey-market goods. They may also more broadly limit supplies in markets where prices are low. Manufacturers may refuse to honor the warranty of an item purchased from grey-market sources, on the grounds that the higher price on the non-grey market reflects a higher level of service even though the manufacturer does of course control their own prices to distributors. Alternatively, they may provide the warranty service only from the manufacturer's subsidiary in the intended country of import, not the diverted third country where the grey goods are ultimately sold by the distributor or retailer. This response to the grey market is especially evident in electronics goods. Local laws (or customer demand) concerning distribution and packaging (for example, the language on labels, units of measurement, and nutritional disclosure on foodstuffs) can be brought into play, as can national standards certifications for certain goods.

Manufacturers may give the same item different model numbers in different countries, even though the functions of the item are identical, so that they can identify grey imports. Manufacturers can also use batch codes to enable similar tracing of grey imports. Parallel market importers often de-code the product in order to avoid the identification of the supplier. In the United States, courts have decided that decoding which blemishes the product is a material alteration, rendering the product infringed. Parallel market importers have worked around this limitation by developing new removal techniques.

The development of DVD region codes, and equivalent regional-lockout techniques in other media, are examples of technological features designed to limit the flow of goods between national markets, effectively fighting the grey market that would otherwise develop. This enables movie studios and other content creators to charge more for the same product in one market than in another or alternatively withhold the product from some markets for a particular time. Consumer advocacy groups argue that this discrimination against consumers—the charging of higher prices on the same object simply because of where they happen to live—is unjust and anti-competitive. Since it requires governments to legislate to prevent their citizens from purchasing goods at cheaper prices from other markets, and since this is clearly not in their citizens' interests, many governments in democratic countries have chosen not to protect anti-competitive technologies such as DVD region-coding.

By industry

Stock market securities

Public company securities that are not not listed, traded or quoted on any U.S. stock exchange or the OTC markets are sometimes purchased or sold over the counter (OTC) via the grey market. Grey market securities have no market makers quoting the stock. Since grey market securities are not traded or quoted on an exchange or interdealer quotation system, investor's bids and offers are not collected in a central spot so market transparency is diminished and best execution of orders is difficult.[5]

Automobiles

Automobile manufacturers segment world markets by territory and price, thus creating a demand for grey import vehicles. In the United Kingdom the term applies to vehicles imported either new from cheaper European countries or from Japanese domestic models imported secondhand from Japan or Singapore, which both have strict laws against older cars. This importation of secondhand models from Japan/Singapore tends to involve sports models that were never released in the UK or models that fetch a high price in the UK because of their performance or status. Although some grey imports are a bargain, some buyers have discovered that their vehicles do not meet British regulations or that parts and service are hard to come by because these cars are different from the versions sold new in the UK.

In New Zealand, grey market vehicles comprise a majority of cars in the national fleet. These secondhand imports have achieved 'normal' status and are used and serviced without comment throughout society. A huge industry servicing and supplying parts for these vehicles has developed. After years of trying to stop grey imports the car companies themselves have become involved, importing in competition with their own new models. Russia and many African countries (excluding South Africa, where second-hand car imports are prohibited) have massive fleets imported secondhand from Japan.

Cell Phones

The emergence of the GSM international standard for cell phones in 1990 prompted the beginning of the Grey Market in the cell phone industry. As global demand for mobile phones grew, so did the size of the parallel market. Today, it is estimate that over 30% of all mobile phones traded will pass through the grey market and that statistic continues to grow. It is impossible to quantify an exact figure, but sources[6] suggest that as many as 500,000 mobile phones are bought and sold outside of official distribution channels through their trading platforms every day. The driving forces behind a heavily active mobile phone grey market include currency fluctuations, customers demands, manufacturers policies and price variations. It is not uncommon for grey market traders to introduce a product into a market months in advance of the official launch. This was evident with the launch of the iPhone 4, where international grey market traders bought large quantities at Apple’s retail price then shipped to countries where the product was not available adding a substantial margin to the resale price.

Computer Games

Purchasing some games from online content distribution systems, such as Valve's Steam, simply requires entering a valid CD key to associate with an account. In 2007, after the release of The Orange Box, Valve deactivated accounts with CD keys that were purchased outside of the consumer's territory in order to maintain the integrity of region-specific licensing. This generated complaints from North American customers who had circumvented their Steam end-user license agreement by purchasing The Orange Box through cheaper, market retailers.[7][8]

Pharmaceuticals

Some prescription medications, most notably popular and branded drugs, can have very high prices in comparison to their cost of transport. In addition, pharmaceutical prices can vary significantly between countries, particularly as a result of government intervention in prices. As a consequence, the grey market for pharmaceuticals flourishes, particularly in Europe and along the US–Canadian border where Canadians often pay significantly lower prices for US made pharmaceuticals than Americans do.

Photographic equipment

Generally regarded as legal in most countries, parallel imports make expensive photographic equipment attractive to savvy users. The grey market in photographic equipment is thriving in highly developed and heavily taxed states like Singapore with dealers importing directly from lower taxed states and selling at a lower price, creating competition against a local authorised distributor. Grey sets, as colloquially called, are often comparable to authorised imports. Lenses or flash units of parallel imports often only differ by the warranty provided, and since the grey sets were manufactured for another state, photographic equipment manufacturers often offer local warranty, instead of international warranty, which will render grey sets ineligible for warranty claims with the manufacturer. Because of the nature of local warranties, importers of grey sets usually offer their own warranty schemes with reduced benefits or lasting a shorter period of time. Grey sets do not differ particularly from an authorised import. They look and function identically, apart from the manufacturer's warranties having been voided. In the salad days of camera sales during the 60s and 70s, when the latter were made of satin chrome outside and brass inside and lenses had amber coating, the bargain basements for Japanese equipment were Hong Kong and Singapore, through which goods were channelled to European shop windows bypassing the often substantial levy of the official importers. World-market pricing and the Internet have largely eliminated this today and certainly the two former sources, that have become expensive if anything. With the dollar in a permanent state of anemia, the cheapest source is probably the USA, a market highly esteemed by manufacturers albeit with a murderous state of competition because of consumer-happy, if highly diligent, bargain hunters. This has led Canon to give their hard-selling DSLR cameras names like "Rebel" in the USA and "EOS" outside it, aimed at preventing the competitively priced US-merchandise reaching Europe where sales are slower but achieve profit higher.

Broadcasting

In television and radio broadcasting, grey markets primarily exist in relation to satellite radio and satellite television delivery. The most common form is companies reselling the equipment and services of a provider not licensed to operate in the market. For instance, a Canadian consumer who wants access to American television and radio services that are not available in Canada may approach a grey market reseller of Dish Network or DirecTV. There is also a grey market in the United States for Canadian satellite services such as Bell TV or Shaw Direct.

In Europe some satellite TV services are encrypted for rights reasons, as they are only entitled to broadcast films, sporting events and US entertainment programming in a certain country or countries, hence only residents of the UK and Ireland may subscribe to Sky Digital. In other European countries with large British expatriate populations, such as Spain, Sky is widely available. Although Sky does not condone the use of its viewing cards outside the UK or Ireland, and has the technology to render them invalid, many people continue to use them.

Illegitimate importing of "free-to-view" Sky cards from the UK to Ireland is often done so that Irish Sky customers can receive Channel 5 and some of the other channels not generally available via Sky in the Republic because of rights issues. Irish Sky viewing cards, which allow viewing of Irish terrestrial channels, are imported into the UK. Northern Ireland residents subscribing to Sky can watch RTÉ One and Two and TG4, although not TV3, which carries many of the same programmes as ITV, a lot of the programmes airing before ITV can show them.

It is also becoming increasingly common in the UK for some pubs to use satellite decoder cards from Greece, Norway, Poland or the Arab world to receive satellite TV broadcasting live English football matches from those countries. Alternatively, they may use cards which allow pirate decryption of scrambled signals. Such cards are typically much cheaper than the cards available in the UK from Sky (who charge extra fees for public showing licenses). However, Sky has taken civil and criminal action against some who do this. Two recent cases involving grey cards have been referred to the European Court of Justice.[9] The suppliers of grey cards and Karen Murphy have won their cases at the European Court of Justice. The judges have ruled that right holders cannot license their content on a exclusive territorial basis as it breaches EU Law on competition and free movement of goods and services. However, whilst this ruling allows domestic viewers to subscribe to foreign satellite services, pubs may still need permission from right holders such as the Premier League to broadcast content. This is because certain elements of the broadcast such as branding are copyrighted. The matter now rests on the High Court to incorporate the ruling into UK Law. C-403/08 - 2011-10-04 - Football Association Premier League and Others

Electronics

There is a grey market in electronics in which on line retailers will sell merchandise below the manufacturer's authorized selling price, or advertise below the MAP.

Frequent Flyer Miles

Trade or bartering of frequent flyer miles is prohibited by nearly all major airlines. Online exchanges of frequent flyer miles – of which several exist – are also useful examples of grey markets.

Snus

Snus tobacco remains legal in Sweden due to a special agreement, but illegal elsewhere in Europe. Import for personal consumption is legal, but import for resale is illegal, although often practiced.

Textbooks

College level textbooks have a grey market, with publishers offering them for lower prices in developing countries or sometimes the UK.[10]

The content of these books is said to differ from the content needed for universities in North America.[citation needed] The content is usually 98% identical to what is taught in different areas of the world. Most commonly the units of measure, spelling of certain words and/or grammar is that of the region it was intended for. Sometimes the editions are not the newest.

For example, a $160 math, chemistry or biology book in Canada, US or Britain could easily be acquired for 10 to 20% of the cost in Asia. The content is identical, the only discernible differences are thinner pages and a soft cover. Most text books are absolutely identical these days except for the quality of the paper and binding, though this has been greatly improved in India by the import of modern manufacturing equipment. Indian Booksellers however, are unwilling to fulfil foreign purchase orders, which means that a local individual is needed to buy the books on his account and ship them, a worthwhile practice for any inter-university cooperation.[citation needed].

These books typically contain a disclaimer stating that importation is not permitted. However, the 1998 U.S. Supreme Court decision Quality King v. L'anza protects the reimportation of copyrighted materials under the first-sale doctrine. Note that this decision does not apply to books manufactured outside the US.[citation needed]

References

  1. ^ "What is Parallel Market". The Gray Blog. http://espinosaiplaw.com/wordpress/?page_id=5. Retrieved 8 September 2010. 
  2. ^ "Hidden economy a hidden danger" San Diego Union-Tribune, May 30, 2010
  3. ^ http://www.nefi.com/NEON/NEON_issues/NEON_May_22_2008.html Victory: "Close the ENRON Loophole" Bill is Small Step In Right Direction
  4. ^ http://news.bbc.co.uk/1/hi/business/2163561.stm Tesco defeated in cheap jeans battle; Case T-415/99 Levi Strauss v Tesco Stores (http://curia.europa.eu/jurisp/cgi-bin/form.pl?lang=en&Submit=Submit&numaff=C-415%2F99)
  5. ^ http://www.otcmarkets.com/otc-101/otc-market-tiers Explanation of grey market securities
  6. ^ www.gsmexchange.com
  7. ^ "Steam Error: Game not available in your territory". Valve Corporation. 2007-10-23. https://support.steampowered.com/kb_article.php?p_faqid=461. Retrieved 2008-03-24. 
  8. ^ Caron, Frank (2007-10-25). "Valve locking out user accounts for "incorrect territory"". Ars Technica. http://arstechnica.com/journals/thumbs.ars/2007/10/25/valve-locking-out-user-accounts-for-incorrect-territory. Retrieved 2007-10-25. 
  9. ^ Case C-403/08 The Football Association Premier League Ltd v QC Leisure http://curia.europa.eu/jurisp/cgi-bin/form.pl?lang=en&Submit=Submit&numaff=C-403%2F08; Case C-429/08 Karen Murphy v Media Protection Services Ltd http://curia.europa.eu/jurisp/cgi-bin/form.pl?lang=en&Submit=Submit&numaff=C-429%2F08
  10. ^ Lewin, Tamar (2003-10-21). "Students Find $100 Textbooks Cost $50, Purchased Overseas". The New York Times. http://www.nytimes.com/2003/10/21/us/students-find-100-textbooks-cost-50-purchased-overseas.html. Retrieved 2010-05-04. 
  • Hays, Thomas (2003) (hardcover). Parallel Importation Under European Union Law. Sweet & Maxwell. pp. 488. ISBN 0-42186-300-5. 
  • Nissanoff, Daniel (2006) (hardcover). FutureShop. The Penguin Press. pp. 246. ISBN 1-59420-077-7. 
  • Stothers, Christopher (2007) (hardcover). Parallel Trade in Europe. Hart Publishing. pp. 526. ISBN 1-84113-437-6. 
  • Michael Levy, Barton A. Weitz (1995) (hardcover). Retailing Management Second Edition. IRWIN. pp. 700. ISBN 0-256-13661-0. 
  • David Sugden (2009) (paperback). Gray Markets: Prevention, Detection & Litigation. Oxford Press. pp. 360. ISBN 978—0-19-537129-1. 

External links


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