Grey Market

The grey market (or gray market) refers to the flow of goods through distribution channels other than those authorized or intended 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 and electronic equipment such as cameras. 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 at a price which provides a profit, but which is below the normal market price there. Because of the nature of grey market economics, it is generally difficult or even impossible to track and verify the precise numbers of grey market sales.

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.

Warranties and Grey Market Goods

Typically the manufacturer will 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. 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.

Of course, if the manufacturer sells to retailers, there’s no privity of contract between the manufacturer and the purchasor either, but the warranty applies nonetheless. Warranty law is not crystal clear, and is highly dependent on the local law.

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; rigorous 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.