A grey market refers to the trade of a commodity through distribution channels that are not authorized by the original manufacturer or trademark proprietor. Grey market products (grey goods) are products traded outside the authorized manufacturer’s channel. When genuine and branded Information Technology (IT) products flow through unauthorized channels, IT gray markets emerge. Grey markets are ubiquitous – they exist for tangible products (lumber and electronic components) and intangibles (broadcast signals, IPOs); for capital-intensive goods (automobiles and heavy construction equipment) and light, easily shipped products (watches, clothing); for the mundane (health and beauty aids) and the life saving (prescription drugs). It is estimated that gray market sales come to more than $20 billion in the information technology sector alone.
Gray markets for IT products represent a grave threat to many IT companies. It remains a basic source of income for millions and provides disguised employment to significant sections of society. It remains unaccounted for while measuring the GDP (Gross Domestic Product, or the Productivity levels) of a country. One of the grimmest issues concerning the grey market is, therefore, how much a developing nation as India depends on the grey market. It is therefore also known in the literature as the ‘parallel economy’, as it functions in a simultaneous manner to the mainstream economy of a particular state or country. There are several misconceptions of it being labeled as the black market-but the black market fundamentally, is largely now considered as an independent forum to the market economy in economic and business models. Because most gray marketers do not guarantee the kind of product warranties and customer service in the same breadth as the original manufacturer, the product reputation is at stake in the long run. In addition, when genuine products are sold at a discounted price because of gray market activity, the esteem in which products are held by customers is reduced, causing the erosion of brand image.
As a consequence, allowing for a smooth flow of these goods has also increased the possibility of counterfeit goods resulting in trademark infringement and harm to goodwill of the owners of the Trademark. The law in India is clear with regard to its strict implementation of imposing liability on intermediaries and sellers with regard to trademark infringement through counterfeit goods.
Price differentials constitute a significant factor behind the ever-growing grey market, and these are incentivized by the abuse of the distribution channels by authorities and partners. Heavily discounted raw materials and end products are made to ship in and flow through the economy, all the while retaining original brand logos and tags. Original brands, therefore suffer immeasurably. Their stock accumulates in inventories, marketing teams fail to understand the reasons for fewer purchases, and eventually, these inventories get sold at discounted rates, once again although now through mainstream channels. In such situations, it is harder for authorized sellers to compete with the grey markets.
For instance, Apple’s iPad 2 was released in the U.S. on March 11, 2011, whereas, in several other countries and Hong Kong, it was released on March 28, 2011. The time lag of two weeks proved to be a boon for gray marketers who sold the iPad2 16GB version for as much as $1025, which is more than twice the actual price of $499.
To understand the liability of channels and sellers that sell these goods, it is important to consider whether the country in which the goods are sold follows a national or an international doctrine of exhaustion. Doctrine of exhaustion reads that the Intellectual Property Rights of the owner over a product are generally exhausted following sale of the product. If a country follows national doctrine of exhaustion, it protects the interest of the owner in the domestic market restricting national imports of the product. On the other hand, the doctrine of international exhaustion asserts that the world is a single market and any sale in any part of the world would invoke exhaustion of rights in following sales.
In India, the Delhi High Court in the Samsung [2013 (53) PTC 112 (Del.)] case recognised the doctrine of international exhaustion while interpreting trademark infringement under the Trademark Act, 1999. This judgment lays down that parallel exports are legal given the seller in the country of import provides a clear description of the products along with the preclusion of warranty from the original owner. In the Amway case, the court held that selling of parallel imports would not automatically account for trademark infringement, however, any sort of impairment in the goods would constitute infringement. Further, the Central Board of Excise and Customs issued a circular in 2012, that allowed parallel imports unless they bear false trademarks or false trade descriptions under section section 102 and section 2(i) of the Trademarks Act, 1999 respectively.
This view limits the restrictions on free trade in our country. This essentially envisages the growth in e-commerce and with it low barriers to entry in the market. The Competition Commission of India, in its order opined that Intel’s policy that provided warranty only to products sold by authorised distributors in India is in effect, an abuse of its dominant position. It stated that this policy would be harmful to parallel imports that are not prohibited in India.
The boom of online advertising and e-commerce has shifted the scope of the grey market to another unscalable territory. Products delivered within 2-3 working days are coming from grey retail shops, as the surplus inventory has to be dealt with or heavy losses must be incurred. These products are extremely hard to identify and more than often, consumers remain unaware of such details and so the market thrives. In order to make consumers aware of fake and/or grey products sold online, one option is a technological solution for consumer authentication. Products are marked with a unique identifier that consumers can enter into an online security platform for verification. The code format of the unique identifier varies depending on the product and the type/quantity of data a brand wants to collect. The most popular combo currently is a combination of RFID for internal tracking and logistics support + NFC or QR code for launching the consumer authentication. In addition to unmasking fakes sold to consumers as authentic, this method gathers the who-what-when-where of every sale and alerts brands in real-time when authentic products turn up out of the channel.
One of the implications on the economy of a thriving grey market is the gross miscalculations with regards to the broad economic factors as GDP, inflation, unemployment, and underlying ones, such as the labor hours, unemployment crisis, product differentiation, ownership of property, and ambiguous profiteering etc. An argument against allowing parallel imports is that restricting the same would yield pro-competitive results. It is premised on the belief that intra-industry demand would fare well if the market is segmented. Further, it places importance on IPR as a solely financial resource that will put the market in a competitive advantage.
However, in a country like India people in marginalized communities are denied access to goods that could otherwise be readily available to them as they are to the majority population. In order to sell their products and balance grey market sales in the market, the companies do sell their products into the grey market to keep their products selling and rolling. This is quite common in a developing country like ours. Thus, the current legal standing as reiterated above favours the majority vis-a-vis free trade.
Needless to say, grey market transactions would not remain far from the purview of the Bitcoin tracking technology. While governments and the economy would benefit from this nexus on bountiful levels, any slight discrepancy in attempting to misuse this information would garner further debates on consumer protection. Henceforth, grey markets must be regulated through stricter scrutiny through regulations and of private contracts keeping in mind the large consumer base further improving trade and investment in the territory.
While there are innumerable supply-side causes behind the expansion of the grey market, a few demand-side issues can also be highlighted. When customers are unaware of the value of a product, any price that a store/firm offers them is generally accepted. This gap in awareness and further an unwillingness to learn about the sources of one’s purchases leads to firms devising ambiguous sale policies. Therefore, the first step in doing away with such a globally redundant malpractice is to be aware of the quality of the product one is purchasing and inevitably think about it’s origins. This might lead one to drop the purchase altogether, but a simple decision as this could prevent an honest sales worker, or a laborer in a factory somewhere from losing their job, besides reducing the viability of such invalid transactions.
Suggested reads –
- Michael, J. (1998) ―A Supplemental Distribution Channel? The Case of U.S. Parallel Export Channels‖, Multinational Business Review (6)1, pp. 24–35.
- Puni, Albert. (2013). GRAY MARKETING THREAT ON MULTINATIONAL SALES REVENUE IN GHANA. 6. 1943-611473.
This article is co-authored by Priyanshi Dixit and Amrita Sharma as a part of an Article series in collaboration with Rethinking Economics.
Priyanshi is a final year law student with keen interest in technology laws. She is the co-founder of r-TLP, a platform for marginalised genders in the tech law and policy field.
Amrita is currently pursuing Masters in Economics from the University of Hyderabad. She is a member of Rethinking Economics India Network (REIN).