Interestingly, however, firms frequently choose to tolerate violations, rather than pursuing complete enforcement i. We draw from the literature on transaction cost economics to propose that tolerance… Expand. View via Publisher. Save to Library Save. Create Alert Alert.
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Publication Type. More Filters. Exclusive dealing has been the subject of intense public policy debate. A central issue in this debate has been the relationship between exclusive dealing and business efficiency. Despite its … Expand. Minimum Advertised Price MAP is a pricing policy widely used by manufacturers to influence prices set by their downstream partners.
A MAP policy imposes a lower bound on advertised prices for … Expand. View 1 excerpt, cites background. Territorial restrictions long have been the subject of intense policy debate. The central issue in this debate has been whether such distribution arrangements are deployed tor efficiency or … Expand. Gray Markets and Supply Chain Incentives. Since gray markets are not officially sanctioned by the manufacturer, their existence … Expand.
The central issue in this debate has been whether such distribution arrangements are deployed for efficiency or … Expand. The objective of this paper is to develop an empirical understanding of sales managers' perceptions of gray markets, that is, exclusive territory violations. We examine a number of factors that can … Expand. Understanding and resolving major contractual breaches in buyer—seller relationships: a grounded theory approach. In business-to-business relationships, sellers are often faced with instances of contractual breaches by buyers.
In many cases, relationship factors preclude legal enforcement of contract terms, … Expand. Rotman School … Expand. Within the distribution channels of fast-moving consumer goods FMCG , the negotiating of agreements with official suppliers is critical for the performance of small and medium-sized SME … Expand.
Highly Influenced. Even so, there may be benefits for a manufacturer in such a situation. For one thing, gray market outlets help keep products price competitive and widely available.
Secondly, as with disk drives, gray markets often consolidate around products with well-established price and performance criteria. These products, familiar to customers who may already have people trained in their use and repair, need less customer education or application development. For disk drives, the scale economies inherent in production oblige companies to work hard at driving costs down a steep learning curve.
The volume represented by gray market channels often affects manufacturing plans and costs. Considering the costs and perceived benefits, it is no wonder that our interviews at the disk drive manufacturer reflect ambivalence about the gray market.
What some people in the field sales office see as a serious problem demanding immediate correction, many at headquarters see as less urgent and perhaps not entirely a problem. Authorized distributors are usually less ambivalent; they see only lost sales. They are often paying for business development in the form of advertising, sales calls on potential customers, and demonstrations to showcase the product and its uses—only to find their accounts buying from a gray marketer who sells at a lower price but offers no services.
On the other hand, authorized distributors often supply gray marketers. Then, having an oversupply, they sell some units to gray marketers outside their territories.
What factors allow unauthorized resellers to prosper? The answers are various, making generalizations from one industry to the next difficult. But certain patterns do emerge, and understanding these patterns is essential to crafting an appropriate response. Supplier pricing policies are probably the most commonly cited factor.
But for many manufacturers there are good reasons for pricing in favor of large orders. Intense competition among drive vendors for big customers makes competitive pricing based on order size imperative, and the supplier that refuses to offer volume discounts will find itself left out in the cold.
Bid customers often sell some of the merchandise to gray marketers, who in turn sell to other customers who would otherwise buy at the higher, book price. This is another way that price differentials, set for competitive reasons for different classes of accounts, help gray markets flourish. International exchange rate fluctuations can cause price differentials and create arbitrage opportunities for gray marketers. As more manufacturers adopt global product strategies, with uniform goods and even multilingual packaging for world markets, international gray markets in many goods may have a bright future.
Batteries and other devices are a case in point. Franchised resellers usually offer important services like advertising, product demonstrations, and point-of-sale as well as postsale services. These functions cost the franchised reseller money, of course. In the early s, IBM imposed stringent requirements on its authorized PC dealers; they had to allocate a certain amount of store space for product demonstrations, keep a certain number of store personnel trained in its equipment, and maintain stock parts sufficient to sustain an acceptable level of customer service.
A reseller that views a product as an incremental addition to its line may not allocate overhead in pricing the product, whereas a reseller that considers the product a staple of its line is likely to accouprice for a popularnt for such costs in its pricing. Loss leaders are an extreme instance of this situation.
Heavy advertising of a cut-rate brand can be a big drawing card to get customers into the store. There the lure of regularly marked-up merchandise often unbranded awaits them. Loss-leader tactics to build traffic are common among gray marketers, if only because they often cannot count on frequent availability of the particular brand.
These developments, however, tug in opposite directions. The Supreme Court ruled in May that a manufacturer that stops selling to a cut-price outlet, in response to complaints from competing, full-price stores, does not necessarily violate antitrust laws. This ruling seemingly introduces an important caveat to a ruling that since then has generally guided manufacturer-distributor relations in the United States. Gray market operators are, of course, unauthorized distributors and so already stand outside the province of this decision.
A bill in the U. Senate a companion to the one already passed by the House tugs the other way. It would make it easier for discounters to bring price-fixing cases against manufacturers and full-price retailers. The Justice Department announced its opposition, but the bill reportedly has substantial support in Congress. At any rate, as this article argues, gray markets usually encompass factors other than pricing policies. While changes in the legal framework that govern channel relations are indirectly relevant, gray markets are likely to remain a real challenge for manufacturers of many kinds of industrial and consumer goods.
Supplier franchise practices can also foster gray markets. When demand is strong, suppliers often discourage intrabrand price competition among their accredited resellers. This creates a price umbrella likely to draw unfranchised dealers into the market.
But the larger franchisees often want to buy direct from the manufacturer, which is obliged to honor the agreement with the parent and refuse them. To avoid the markup the parent generally takes in selling products to its dealers, the larger franchisees may buy on the gray market. IBM and other computer makers have encountered this situation in PCs. Contract terms by which manufacturers rationalize production scheduling or smooth inventory levels can sustain gray markets.
A common feature of industrial contracts is a returns penalty. In this business, lot size is important to production costs, and the company enforces these stiff stipulations to keep its scheduling efficient and its production costs competitive.
But disk drives are a business in which demand fluctuates widely from quarter to quarter and new product introductions are frequent. So customers often find it hard to forecast precisely over a one-to two-year span. In some industries, including disk drives, dynamic product performance improvements go hand in hand with downdrafts in prices caused by hot competition among suppliers.
Falling prices make customers, as well as distributors, more price sensitive as they try to protect their cost structures against competition. So they willingly sign large-order contracts that qualify for the biggest discounts.
At the same time, the fast pace of product introductions is increasing the risk of perceived product obsolescence over the one-or two-year lives of the purchase contracts. So customers try to find ways—perhaps through gray marketers—to escape the cancellation charges. Consequently, they may be inclined to condone sales to gray marketers, and the result can be a vicious circle.
When the sparring between manufacturer and distributor becomes intense—the pages of trade publications often ring with accusations and counteraccusations—it is useful to recognize the irony of the situation. Even though good business practices can lead to a very undesirable outcome, they should not necessarily be abandoned when the manufacturer is evaluating the options for dealing with the problem.
In answer, manufacturers generally adopt one or more of the following responses. Each has its logic and its limitations. Disenfranchisement of offenders is a stock and emotionally satisfying response. In an effort to identify suppliers to unauthorized dealers, Lotus Development Corporation recorded the bar-code numbers of its popular 1—2—3 software packages as they were shipped out.
Eventually Lotus eliminated from its list those distributors doing business with gray marketers and put a temporary freeze on agreements with new distributors. Such moves send loud signals of commitment to distributors who abide by the terms of the franchise agreement. These signals often are a response to complaints from them.
Tracking down offenders, however, costs money. Moreover, the manufacturer that selectively disenfranchises dealers runs the risk of being sued.
A one-price-for-all policy can eliminate an important source of arbitrage and allow the supplier to reassert a measure of channel control.
But this policy often means sale of most of the output at lower prices to all customers, big or small, regardless of transaction costs. Furthermore, this strategy often forecloses valid price discrimination opportunities among classes of customers who are buying very different benefits in the same product. While price may be the main criterion for some customers, for others continuity of supply and aid in application development may be more important.
A meaningful one-price-for-all strategy must also include a way to reward the full-service dealers in the network. They usually have other supply options available. Most systems for direct payment to these dealers for the extra services they furnish are as financially and administratively cumbersome as procedures for tracking sales to unauthorized dealers.
This strategy also may not eliminate arbitrage opportunities since cost differentials and differing reseller strategies also give rise to gray markets and may make it harder for the manufacturer to alter its distribution strategy as changing market conditions require. Adding distributors perhaps former gray market distributors to the network can be a solution.
By limiting circulation of a popular item to a few dealers, the supplier may inadvertently have created demand that can be satisfied only through transshipment to gray outlets. Franchising more distributors may give the supplier better control over the flow of its product to market. The supplier must be careful, however, not to put itself in the middle of disputes among distributors over turf. Important dealers may switch to a competing line with less intensive distribution.
Tinkering with relationships with channel mainstays by adding distributors can be a very dangerous business. For the manufacturer, every option has costs and risks, but the status quo is also unacceptable. What, then, to do? First, get accurate and timely information. In our research we found that managers were often woefully uninformed about the magnitude or channel dynamics of gray markets for their goods.
As we have seen, the standard sources of market information, field salespeople and distributors, can be unreliable. Recall the district sales manager for the disk drive maker who reported that salespeople in the same branch office gave him different stories.
And, as we have seen, distributors often have a foot on each side of the street. Therefore, the supplier often must create, or bolster, alternative data sources. As transaction volume rises, collection of such data on a timely basis can become costly.
The networks of most suppliers have distributors that perform various functions—which implies different operating costs for the distributor and different value-added opportunities for the particular product line.
These suppliers look to full-service distributors to support product introductions and to service the high end of the market, while relying on low-service distributors for those market segments that are concerned mostly with price. These manufacturers also generally avoid block franchising on the grounds that what they gain at first in lower selling expenses usually for a new product line they can soon lose in the form of gray market action and dilution of channel effectiveness.
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