Grey market

The grey market (in U.S. spelling, gray market) refers to the flow of goods through distribution channels other than those authorized by the manufacturer or producer. Unlike those on the black market, grey market goods are not illegal. Instead, they are being sold outside of normal distribution channels by companies which may have no relationship with the producer of the goods. Frequently this occurs when the price of an item is significantly higher in one country than another; this situation commonly occurs with cigarettes, electronic equipment such as cameras, and wine. Entrepreneurs will buy the product where it is available cheaply, often at retail but sometimes at wholesale, import it legally to the target market and sell it a price which provides a profit but which is below the normal market price there.

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.

The existence of the grey market is an example of the economic practice called arbitrage.

Warranties and grey market goods

Typically the manufacturer will refuse to honor the warranty of a item purchased from grey market sources, on the grounds that the higher price on the non-grey-market reflects a higher level of service. This is particularly evident in electronics goods. Manufacturers may give the same model different model numbers in different countries even though the functions of the particular machine are identical. When a manufacturer identifies a particular product as not destined for that particular country the purchaser can then only seek warranty service 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. As there is no privity of contract between the manufacturer and consumer neither the implied warranty of fitness nor the implied warranty of merchantability apply to grey market goods.

Other 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 good in the target market. Often this is the national subsidiary of the manufacturer, or a related company, which is the local licensee of the manufacturer's trademarks; rigourous prosecution of trademark laws to restrict advertisements for the product is thus a common tactic used to discourage the grey market, along with refusal to honour warranties and refusal to deal with distributors and retailers (and with commercial products, customers) that trade in grey-market goods. Local laws (or customer demand) concerning distribution and packaging (for example, the language on labels, units of measurement, and nutritional disclosure of foodstuffs) can be brought into play, as can national standards certifications for certain goods.

The development of region codes on DVD disks, 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 in that product.

Conversely, international efforts to promote free trade, including reduced tariffs and harmonized national standards, facilitate the grey market where manufacturers attempt to preserve highly disparate pricing.

The grey market in 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 20 Euros in France, for marketing purposes. It is often profitable to buy the wine in Europe, typically from an authorized distributor, and resell it in the U.S. 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 U.S. 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 who worries the most 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.