Grey market

The grey market is the trade of something legal through unofficial, unauthorized, unintended distribution channels. In contrast, black market refers to goods and services that are illegal in themselves and/or distributed through illegal channels. The two main types of grey market are imported manufactured goods that would be normally unavailable or more expensive in a certain country and unissued securities that aren't yet traded in official markets.

Grey market of goods

Grey-market goods are not generally illegal. Instead, 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 cigarettes and 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 normally new and should be distinguished from used or second-hand goods.

Grey-market goods should also be distinguished from black-market goods, which are typically illegal. 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 infringing goods.

Responses to the grey market

The parties most concerned with the grey market of a good 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.

Enforcement of intellectual property rights

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.

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.

Refusal to supply

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.

Refusal to honor warranties

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. 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.

Reliance on regulation

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.

Tracing grey-market 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.

Technological measures

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.

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.

Grey market of securities

In securities markets, grey market refers to the buying and selling of securities to be issued in the future, and therefore not yet circulating. This typically occurs some days before an auction of government bonds or bills and that trading is subject to the effective issue of those securities. Sometimes this is taken as a forecast of the prices that markets expect for future issues.

IPO grey market in India

Cities like Ahmedabad, Kolkata and Rajkot are the most active centres for the IPO (initial public offerings) grey market. Trades done in the grey market are settled on the day of listing. Once the deal is done at a stipulated price, the seller must deliver the shares after he has been allotted the shares by the company. If the seller falls short in receiving the exact number of shares that he has sold in anticipation, then he must buy the shares on the market (once the share is listed) to honour his commitment.

Most of the recently-concluded initial public offerings are quoting at a significant premium in the grey market, compared to their issue prices; this means that the issues are perceived to have been underpriced.

Many traders short sell in the grey market if they feel that the premium on offer is unwarranted and that the stock may list at a price lower than what most market players expect it to. Though grey-market operators say that there is a constant change in the grey-market premium, it largely depends on the subscription on the last day and the market conditions, post issue closing.

Example: Grey market premium for the Roman Tarmat issue went up from Rs 28-30 to Rs 110-140. This was because the issue was subscribed around 30 times eventually, after receiving a lukewarm response from investors during the first two days when it was open for subscription. Though illegal, the grey market continues to thrive. Investors who bid for an issue normally do not get the full quantity because of the limits for each class.

This has resulted in many people "selling" their IPO applications to the grey market operators for a secured interest. Many investors earn a fixed amount - anywhere between Rs 2,500 and Rs 4,000 by selling their IPO applications to grey-market operators in Ahmedabad. Though many IPOs are yet to open for subscription, investors may need to look at more than the prospectus when subscribing to IPOs. Street-smart investors would rather look at indicators from the booming grey market before taking a call on IPO investments.

It is not only market-savvy investors from Gujarat, but also lead managers of IPOs from Mumbai, Delhi and other parts of the country, who look at Ahmedabad's grey-market premium rates as an indicator of the price at which the issue is likely to get listed.

Sites such as Deadpresident give out grey market premiums on daily basis

Grey market by industry

Wine

The grey market in wine flourishes, particularly in the case of champagne. Many large champagne producers do their own importing, and desire to maintain independent price points in different markets. Thus a bottle of Champagne might cost US$35 in the United States while the same bottle might be only 15 Euros in France. It is often profitable to buy the wine in Europe from an authorized distributor, and resell it in the US. In the case of enormous pricing disparity, it is not uncommon to find a grey-marketed wine selling for less at retail than the wholesale price of the authorized distributor. In the case of a large availability disparity between the US and Europe, the grey market price may be the same or higher than the authorized price.

Typically the importer of a wine is the one most concerned about grey market sources. The winemaker may or may not care what happens to the wine after it is sold, although he or she might complain to appease an importer.

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 due to 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 South Africa are two other countries with massive fleets imported secondhand from Japan.

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.

Pianos

Some people who believe the idea of grey-market pianos to be a scare tactic, while others agree with the manufacturer's claims that pianos brought overseas are likely to under-perform expectations for the brand and may develop serious problems as a result of the wood in the pianos not being properly seasoned for the climate to which they are exported. Yamaha Corporation claim that their piano assembly plant in Hamamatsu, Japan contains large rooms where pianos are seasoned for different climates worldwide under strict guidelines. Yamaha tries to discourage grey pianos by suggesting they are unsafe on their website: [1]. Like other electronics manufacturers, they will not honour their product warranties for grey products. Yamaha provides a free serial number search [2] on their website to determine whether a used Yamaha piano was imported against their wishes.

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.

Due to the nature of local warranty, importers of grey sets usually mask the flaw in warranty with their own warranty schemes. These are often warranties 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.

Broadcasting

Main article: Pirate decryption

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 ExpressVu or Star Choice.

In Europe 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 Five and some of the other channels not generally available via Sky in the Republic due to 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.

In the UK some pubs have obtained viewing cards to receive satellite TV from Norway, which broadcasts live English football matches only available on pay-per-view on Sky, although they face legal action from rights holders and broadcasters.

A reseller may offer the licensed product at lower prices using pirate decryption of scrambled signals, although unlike grey market cards used outside a particular country, this may result in civil or criminal prosecution (if locally illegal).

Video games and other popular holiday season 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.

References

• Hays, Thomas (2003). Parallel Importation Under European Union Law. Sweet & Maxwell. ISBN 0-42186-300-5. (Hardcover, 488 pages)

• Nissanoff, Daniel (2006). FutureShop: How the New Auction Culture Will Revolutionize the Way We Buy, Sell and Get the Things We Really Want. The Penguin Press. ISBN 1-59420-077-7. (Hardcover, 246 pages)

• Stothers, Christopher (2007). Parallel Trade in Europe: Intellectual Property, Competition and Regulatory Law. Hart Publishing. ISBN 1-84113-437-6. (Hardcover, 526 pages)

• Michael Levy, Barton A. Weitz (1995). Retailing Management Second Edition. IRWIN. ISBN 0-256-13661-0. (Hardcover, approx. 700 pages)

External links

• The Gray Blog, a blog dedicated to law related to the grey market