The Dynamics of Domestic Gray Markets and Its Impact on Supply Chains

Gray markets are created by unauthorized retailers selling manufacturer's branded products. Similar to international gray markets, domestic gray markets are a growing phenomenon whose impact on supply chains is not clear. We consider a supply chain with one manufacturer and several authorized retailers who face a newsvendor problem and a domestic gray market. While a gray market provides an opportunity for retailers to clear their excess inventory (inventory‐correction effect), it also can be a threat to their demand (demand‐cannibalization effect). We first characterize the emerging equilibrium by assuming an MSRP environment. Comparing a decentralized and centralized system, we show that a wholesale pricing contract is quite efficient in a gray market environment; we explain the underlying mechanism and note some of the operational decisions that could hurt that efficiency. We show that the gray market price determines the degree of both the negative effects of demand‐cannibalization and the positive effects of inventory correction, which in turn determines the net impact of gray markets on the retailer's stocking choice and, ultimately, the manufacturer's profit. We then study the authorized retailers' problem as a price‐setting newsvendor. We observe that the gray market creates price competition between the authorized and unauthorized retailers, causing a drop in the primary market price. However, this price competition can be counteracted by the authorized retailers' stocking decision. Finally, we extend our model to consider the cases where the demand can be correlated across retailers.     

Coping with Gray Markets: The Impact of Market Conditions and Product Characteristics

Gray markets, also known as parallel imports, have created fierce competition for manufacturers in many industries. We analyze the impact of parallel importation on a price‐setting manufacturer that serves two markets with uncertain demand, and characterize her policy against parallel importation. We show that ignoring demand uncertainty can take a significant toll on the manufacturer's profit, highlighting the value of making price and quantity decisions jointly. We find that adjusting prices is more effective in controlling gray market activity than reducing product availability, and that parallel importation forces the manufacturer to reduce her price gap while demand uncertainty forces her to lower prices. Furthermore, we explore the impact of market conditions (such as market base, price sensitivity, and demand uncertainty) and product characteristics (“fashion” vs. “commodity”) on the manufacturer's policy towards parallel importation. We also provide managerial insights about the value of strategic decision‐making by comparing the optimal policy to the uniform pricing policy that has been adopted by some companies to eliminate gray markets entirely. The comparison indicates that the value of making price and quantity decisions strategically is highest for moderately different market conditions and non‐commodity products.     

基于灰色市场可追溯的RFID技术策略与窜货行为的博弈研究

考虑由一个制造商、一个零售商及两个独立市场（高端市场和低端市场）组成的供应链，针对零售商可能窜货而形成的灰色市场问题，构建了制造商RFID技术策略（采纳与否）和零售商窜货行为（窜货与否）的博弈模型，分析了RFID技术对灰色市场、企业收益及社会福利的影响，得到了博弈的纳什均衡策略。研究表明：1）窜货总是零售商的占优策略，而制造商RFID技术采纳策略取决于对零售商窜货的惩罚成本和RFID技术成本的高低；2） RFID技术和零售商窜货均会降低社会福利水平。     

Supply Chain Coordination in the Presence of Gray Markets and Strategic Consumers

The practice of diverting genuine products to unauthorized gray markets continues to challenge companies in various industries and creates intense competition for authorized channels. Recent industry surveys report that the abuse of channel incentives is a primary reason for the growth of gray market activities. Therefore, it is crucial that companies take the presence of gray markets into consideration when they design contracts to distribute products through authorized retailers. This issue has received little attention in the extensive literature on contracting and supply chain coordination. In this study, we analyze the impacts of gray markets on two classic contracts, wholesale price and quantity discount, in a supply chain with one manufacturer and one retailer when the retailer has the opportunity to sell to a domestic gray market. Our analysis provides interesting and counterintuitive results. First, a classic quantity‐discount contract that normally coordinates the supply chain can perform so poorly in the presence of a gray market that the supply chain would be better off using a wholesale price contract instead. Second, the presence of gray market can also degrade the performance of the wholesale price contract; therefore, a more sophisticated contract is needed for coordinating the supply chain. We show that contracts that solely depend on retailer's order quantity cannot coordinate the supply chain, and provide the conditions for coordinating the supply chain with price‐dependent quantity discount contracts. We also provide comparative statics and show that when there is a gray market, coordinating the supply chain enhances total consumer welfare.     

制造商售后服务质量决策对灰色市场的影响研究

考虑一个分散式供应链下零售商窜货的灰色市场结构，其中制造商直接将产品销往高端市场，但通过中间零售商销往低端市场，两个市场相对独立。零售商未经制造商授权私自将产品窜货到高端市场而形成灰色市场。为了抑制灰色市场，制造商额外在低端市场提供增值售后服务。本文将建立两种模型：基本模型和服务决策模型，通过两种模型的对比分析，研究制造商售后服务质量决策对灰色市场规模和企业收益的影响。研究发现：对于制造商而言，售后服务质量决策是一种有效的灰色市场管理手段，不仅可以抑制灰色市场规模，同时还可以增加制造商的收益；对于零售商而言，售后服务质量决策有可能降低零售商的收益，也有可能增加零售商的收益，取决于消费者对高端产品和低端产品支付意愿的差异程度。     

Gray Markets,A Product of Demand Uncertainty and Excess Inventory

Diverting large quantities of goods from authorized distribution channels to unauthorized or “gray market” channels, albeit legal, significantly affects both firms and consumers due to effects on price, revenue, service and warranty availability, and product availability. In this paper we consider mechanisms by which the uncertainty surrounding inventory ordering decisions drives gray markets. We start with a minimal stochastic supply chain model composed of a producer and a retailer; then we restructure the model to add a distributor whereby the distributor and authorized retailer have the option of diverting inventory to a gray market. Our analysis sheds light on three issues: impacts of diversion on the various supply chain participants, strategies producers could use to combat or exploit gray markets, and important considerations for authorized retailers trying to set optimal order quantities in the presence of a gray market. Our analysis yields new insights into the behavior and impact of gray markets, which can inform management strategies and policies for confronting them.     

Supplier Encroachment and Investment Spillovers

It is conventional wisdom that a manufacturer's encroachment into retail space will likely hurt an existing retailer. In contrast to this conventional belief, current research indicates that a retailer may welcome a manufacturer's encroachment despite the new competition in the final market. The encroachment may help the manufacturer have some “skin in the game” at the retail level, which will cause the manufacturer to make a selfish cost‐reducing investment that spills over to the retailer as a lower wholesale price. Such a spillover effect enhances the retailer's profit as long as the encroachment does not result in extreme retail competition by a certain degree of product differentiation, and ultimately generates Pareto gains in the supply chain. The spillover effect is so robust that the retailer's benefit from the encroachment remains even after considering potential mitigating factors such as selling costs, a nonlinear form of cost reduction, decentralized encroachment, additional retail competition, price competition, and a negotiation between the manufacturer and the retailer.     

灰色市场环境下的服务策略研究

考虑零售商可能参与灰色市场投机,我们构建一个由制造商和零售商组成的两阶段博弈模型,并分别研究制造商是否提供服务以及零售商是否参与灰色市场投机组成的四种情景。研究结果表明：首先,不管制造商在高价市场中是否提供差异化服务,在替代系数和低价市场需求弹性都适宜的条件下零售商都参与灰色市场投机以获取额外的利润,并且双方在一定条件下实现共赢。其次,制造商提供服务能缩小零售商参与灰市投机的空间和减少利润受损的空间。再次,消费者对产品服务敏感性越高,服务策略应对灰色市场的效果越好。最后,服务水平与敏感系数和替代系数两个因素相关。     

When Gray is Good: Gray Markets and Market‐Creating Investments

Gray markets arise when an intermediary buys a product in a lower‐priced, often emerging market and resells it to compete with the product's original manufacturer in a higher priced, more developed market. Evidence suggests that gray markets make the original manufacturer worse off globally by eroding profit margins in developed markets. Thus, it is interesting that many firms do not implement control systems to curb gray market activity. Our analysis suggests that one possible explanation lies at the intersection of two economic phenomena: firms investing to build emerging market demand, and investments conferring positive externalities (spillovers) on a rival's demand. We find that gray markets amplify the incentives to invest in emerging markets, because investments increase both emerging market consumption and the gray market's cost base. Moreover, when market‐creating investments confer positive spillovers, each firm builds its own market more efficiently. Thus, firms can be better off with gray markets when investments confer spillovers, provided the spillover effect is sufficiently large. These results provide a perspective on why firms might not implement control systems to prevent gray market distribution in sectors where investment spillovers are common (e.g., the technology sector) and, more broadly, why gray markets persist in the economy.     

Contracting in a Supply Chain with Stochastic Demand and Substitute Products

Retailers often stock competing products from multiple manufacturers. When the retailer stocks out of a particular item, customers who prefer the item are likely, with some probability, to switch to a substitute product from another manufacturer at the same store. In such an event, a “lost sale” for the manufacturer is not a “lost sale” for the retailer. This exacerbates differences in manufacturer's and retailer's stockout costs for the item. Such differences in stockout cost influence the optimal contract between the manufacturer and the retailer and also impose agency costs on the channel. Such contracts, in turn, determine equilibrium inventory levels and fill rates. We study these issues in a single‐period supply chain, consisting of a manufacturer and a retailer, under three different scenarios (when the two firms are integrated into a single entity, when the retailer makes stocking decisions, and when the manufacturer makes stocking decisions). We compare, and present a methodology for comparing, stocking quantities, manufacturer efforts, and supply chain profits across different scenarios. We find that VMI performs better when manufacturer effort is a substantial driver of consumer demand and when consumers are unlikely to substitute to another brand in case of a stockout. On the other hand, if non‐contractible manufacturer effort is unimportant, or when substitution is significant, VMI can exacerbate, rather than mitigate, channel inefficiencies, and can perform worse than traditional Retailer Managed Inventory.     

Controlling Power Retailer's Gray Activities Through Contract Design

We develop a model that captures dynamic relationships of a supply chain populated by a dominant retailer and a number of fringe retailers. The two types of retailers are asymmetric in buying power, retailing cost, and the ability to service the manufacturer's product. The wholesale prices offered through a quantity discount (QD) schedule can coordinate such a supply chain, but invite channel flow diversion type of gray trading between the dominant retailer and the fringe retailers. Our analysis is focused on how such a channel can be coordinated and the gray market activities be prevented. We propose a dynamic QD contract or a revenue‐sharing contract that the manufacturer can use to fight the gray market activity. The performance of the supply chain and the manufacturer's profit under each of the two contract forms are compared and managerial guidelines are provided to help the manufacturer make a judicious choice.     

The Strategic Role of Third‐Party Marketplaces in Retailing

Retailers are increasingly adopting a dual‐format model. In addition to acting as traditional merchants (buying and reselling goods), these retailers provide a platform for third‐party (3P) sellers to access and compete for the same customers. We investigate the strategic rationale for a retailer to introduce a 3P marketplace. Our analysis provides insights into the growing prevalence of 3P marketplaces. We show that by committing to having an active 3P marketplace, the retailer creates an “outside option” that improves its bargaining position in negotiations with the manufacturer. This can explain the increasing prevalence of such marketplaces. On the other hand, the manufacturer would prefer to eliminate the retailer's outside option and should seek to limit or prevent sales through 3P marketplaces. This is consistent with actions that several manufacturers have taken to limit such sales. Interestingly, if the manufacturer fails to eliminate sales of competing products through the 3P marketplace, then the best strategy for the manufacturer is to allow the retailer to dictate the terms of their contract. This is because a powerful retailer will rely less on its outside option in generating profit, and therefore it will increase the fees charged to 3P sellers and soften the competition between 3P sellers and the manufacturer. The decrease in competition will lead to an increase in the value of outside option of the manufacturer and improve its profit. Additionally, we find that the presence of a 3P marketplace benefits consumers, but this benefit diminishes as the retailer becomes more powerful.     

The Effect of Delayed Incentives on Supply Chain Profits and Consumer Surplus

We examine the use of consumer cash mail‐in rebates offered by a manufacturer in a Stackelberg game where the manufacturer is the leader and the retailer is the follower. Our analysis indicates that rebates are profitable for manufacturers if consumers are inconsistent in the sense that their rebate valuation when they make purchase decisions is independent of their redemption probabilities when they make redemption decisions. If the manufacturer keeps the wholesale price unchanged, then the rebate increases the retailer's profit by a larger amount than the increase in the manufacturer's profit. If the manufacturer jointly optimizes the wholesale price and rebate, then the increase in the manufacturer's profit is twice the increase in the retailer's profit. The retailer responds to rebates by increasing the retail price, which increases the margin paid by consumers who do not redeem the rebate. On average, consumer surplus decreases when it is optimal for manufacturers to offer rebates. We suggest incentive schemes that make it worthwhile for retailers to limit the price increase. In these incentive schemes, the manufacturer imposes a negative relationship between the rebate value and the retail price. We show that such incentives increase supply chain profits.     

Implications for the Role of Retailers in Quality Assurance

We investigate a manufacturer–retailer channel to explore the role of a retailer in assuring the quality of a manufacturer's product as a quality gatekeeper. Such a gatekeeping activity can entail a reduction in the defective rate for consumers, if the retailer charges the manufacturer a penalty for each identified defect that is no smaller than the market penalty for an unidentified defect. As a result of the retailer's gatekeeping, the change in the negotiated wholesale price only depends on the manufacturer's individual benefit, whereas the change in the retailer's optimal retail price is associated with the channel‐wide benefit. When the impact of quality relative to retail price on demand is higher, the retailer benefits more from her gatekeeping activity, thus having a greater incentive to take on the quality gatekeeping responsibility. Moreover, the retailer's gatekeeping generates a larger increase in the demand as well as each firm's profit, when the retailer has a stronger relative bargaining power.     

Manufacturer–Retailer Negotiations in the Presence of an Oligopolistic Input Market

When a manufacturer relies solely on its own inputs in making products, the focus of negotiations between the manufacturer and retailer is exclusively on profits in the output (retail) market. In such cases, absent retail competition concerns, standard two‐part tariff negotiations set the per‐unit wholesale price equal to marginal cost, and require fixed transfers from the retailer to the manufacturer. In this article, we recognize that manufacturers often rely on imperfectly competitive markets for at least some inputs. Incorporating this seemingly natural feature has profound implications for manufacturer–retailer negotiations since it shifts their focus from being exclusively on output markets to one that balances strategic concerns in both input and output realms. The article's main result is that the added need to discipline input prices can lead the manufacturer and retailer to write contingent contracts that are cost‐plus and prescribe lump‐sum slotting allowances (i.e., fixed transfer from the manufacturer to the retailer).     

Differential Pricing for Information Sharing Under Competition

We consider a two‐echelon supply chain with a manufacturer supplying to multiple downstream retailers engaged in differentiated Cournot competition. Each retailer has private information about uncertain demand. The manufacturer is the Stackelberg leader who sets the contract terms with the retailers, and benefits from retailers sharing their private information. When all retailers are given the same wholesale price, truthful information sharing is not an equilibrium outcome. We propose two variants of differential pricing mechanisms that induce truthful information sharing by all retailers. The first variant rewards a retailer for providing optimistic information and achieves truthful information sharing as a unique equilibrium. The differential pricing mechanism is optimal in the class of linear‐price, incentive‐compatible, direct mechanisms. The second variant, which incorporates provision for a fixed payment in addition to wholesale prices, preserves all the equilibrium properties of the first variant and additionally “nearly coordinates” the supply chain. Our analysis of differential pricing with a fixed payment provides interesting observations regarding the relationship between product substitutability, number of retailers, information precision, and market power. As products become closer substitutes and/or number of retailers increase, the manufacturer's market power increases, enabling her to extract a larger fraction of the supply chain surplus.     

信息共享下库存量牛鞭效应的影响因素研究

目前的研究多从供应链上游角度出发考虑传统牛鞭效应,而本文从供应链下游的角度研究库存量牛鞭效应得到了不一样的管理学启示.在需求函数方面,建立的需求模型包括市场规模、价格敏感性系数等更有现实意义的要素.在此,本文建立了包括一个零售商和一个制造商的简单两级供应链,得出了制造商在采用补充至订货点策略和最小均方差预测技术,在两种不同的信息共享模式下的库存量牛鞭效应表达式,并对他们的影响因素进行了分析.而且通过数值分析对模型进行了验证并得到新的结果.通过研究发现,信息共享能够显著降低制造商的库存量牛鞭效应;零售商和制造商的库存量牛鞭效应都不受市场规模的影响;零售商的库存量牛鞭效应在一定条件下不存在;相比于零售商提前期,制造商提前期对制造商的库存量牛鞭效应影响更大.同时,价格敏感性系数、价格自相关系数等因素对制造商库存量牛鞭效应也有不同程度的影响.     

Mean-risk analysis of radio frequency identification technology in supply chain with inventory misplacement: Risk-sharing and coordination

This paper investigates the application of radio frequency identification (RFID) technology to eliminate the misplacement problems in the supply chain, which consists of a risk-neutral manufacturer and a risk-averse retailer. By considering both fixed cost and tag cost of RFID implementation, we study the agents' incentives to adopt RFID in both uncoordinated and coordinated cases. We focus on analyzing the impact of risk attitudes on the agents’ incentives and on the supply chain coordination. The central semi-deviation is adopted to measure the retailer's risk attitude. In the uncoordinated case, we find that, in order to induce the retailer to adopt RFID, the manufacturer must assume more fixed cost if the retailer is more risk-averse. In the coordinated case, we first show that the standard revenue sharing contract does not always coordinate the channel. If the channel is coordinated, we observe that the agents’ incentives will be perfectly aligned and independent of the risk attitudes, if the revenue sharing ratio equals the fixed cost sharing ratio. Then we propose a risk-sharing contract that offers the risk protection to the retailer, to achieve the channel coordination. An interesting finding is that the manufacturer's incentive will not decrease with the tag cost, if she takes much risk from the retailer. The corresponding impacts of RFID adoption on the two contracts are also analyzed in this paper. Finally, a case study in a tobacco industry is presented to show the real RFID cost in practice.     

The Impact of Product Returns and Retailer's Service Investment on Manufacturer's Channel Strategies*

We study the distribution channel decision of a manufacturer who considers whether to add an online channel (direct channel) to its brick‐and‐mortar retailer (indirect channel). The retailer faces the opportunity to invest in store assistance to help consumers choose products and thus reduce product returns. Special attention is given to the impact of product returns and retailer's store assistance investment on manufacturer's dual channel decision. We examine conditions under which the manufacturer uses dual channels and how various relevant factors affect its channel decision under two settings, depending on whether the retailer has its own online store or not. When the retailer does not have its online store, we find that (i) the addition of the direct channel raises the wholesale price; (ii) the direct channel addition hurts the retailer if the nonreplacement rate is low; (iii) the manufacturer has a lower incentive to add the direct channel when the retailer's service cost is lower or its returns reduction rate from service investment is higher; and (iv) the manufacturer should treat its own returns handling cost as a key factor in its channel structure decision. In addition, when the retailer operates an online store, we find that the manufacturer may have an incentive to add a direct channel such that both firms own direct channels.     

Impacts of demand uncertainty on retailer's dominance and manufacturer-retailer supply chain cooperation

Recent studies in marketing and distribution channels have shown that the balance of power between manufacturers and retailers is shifting. Based on this observation, we investigate a two-echelon supply chain with a manufacturer and a retailer in this paper. We first develop retailer-dominant non-cooperative game models by introducing a sensitivity of retailer's order quantity to manufacturer's wholesale price; then we analyze two cooperative scenarios, in which the Nash bargaining model is utilized to implement profit sharing between the manufacturer and the retailer. Under the assumption that the manufacturer and the retailer are risk-neutral, we find that the manufacturer and the retailer can bargain to cooperate at any level of retail-market demand uncertainty with exogenous retail price. However, the cooperation is conditional on retail-market demand uncertainty with endogenous retail price: it can be implemented if the fluctuation of retail-market demand is relatively small, and the measure of retail-market demand uncertainty does not exceed an upper bound. Theoretical and numerical analyses show that the retailer's dominance over the manufacturer increases with the increase in the sensitivity of retailer's order quantity to manufacturer's wholesale price under a limitation of retail-market demand uncertainty. Numerical analyses also show that the retailer's dominance decreases with the increase in retail-market demand uncertainty.