How to Address the Gray Market Threat Using Price Coordination

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A U.S.-based company sells prestigious high-priced liquor under the same established brand name in almost every country around the world. Recently, the director of global marketing at corporate headquarters received strong complaints from the head of the company’s subsidiary in Japan about the substantial quantities of the product that had entered Japan through the gray market. The gray market products are sold at a considerable discount, thus cannibalizing product sales through authorized channels and threatening the high-prestige image of the product in Japan.

The homogenization of customer demand around the world, the lowering of trade barriers, and the emergence of international competitors all contribute to the pressure on companies to market truly global products, that is, products that are almost identical everywhere and backed by global advertising strategies. Examples are such products as Coke and Pepsi-Cola, Levi’s jeans, Swatch watches, Nikon and Minolta 35mm cameras, Sony car stereos, Honda Civic or BMW 320i cars, Caterpillar tractors, and Vizir, a liquid detergent from P&G Europe.

At the same time, these largely undifferentiated global products are sold at different prices in different countries, based on such factors as purchasing power, exchange rate changes, and competition. Because of readily available, inexpensive information on worldwide prices made possible by modern data transfer and telecommunications systems and low transaction costs, such global products are often threatened by gray markets that cannibalize sales in countries with relatively higher prices and damage relationships with authorized distributors, as the opening example illustrates.

In this paper, we discuss how multinationals are addressing the gray market threat through various price coordination methods. These companies control the threat without resorting to drastic measures, such as differentiating the products for each country or revamping the distribution channels. Even though the coordination mechanisms are likely to incur a cost, they are often preferable to other measures because they allow companies to benefit from product standardization and a unified positioning strategy for their global products.

Research on pricing issues is underrepresented in the international marketing literature. In their research, Aulakh and Kotabe suggest that the reason for the neglect of this important issue is “the inherent difficulty in getting information from international companies due to the sensitive nature of such information.”1 We have based this paper on a review of the literature and several interviews with managers active in global pricing decisions.

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1. P.S. Aulakh and M. Kotabe, “An Assessment of Theoretical and Methodological Development in International Marketing: 1980–1990,”Journal of International Marketing 1 (1993): 5–28, 10.

2. L.P. Bucklin, “Modeling the International Gray Market for Public Policy Decisions,” International Journal of Research in Marketing 10 (1993): 387–405, 387.

3. J. Cross, J. Stephans, and R.E. Benjamin, “Gray Markets: A Legal Review and Public Policy Perspective,” Journal of Public Policy and Marketing 9 (1990): 183–194, 183.

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5. Cross et al. (1990): 183.

6. “Parallel Market for Cars in the EC” (Brussels: Bureau Europeen des Unions des Consommateus, No. 222/92, 1992).

7. For a discussion of the optimal rate of “leakage,” see:

E. Gerstner and D. Holthausen, “Profitable Pricing When Market Segments Overlap,” Marketing Science 5 (1986): 55–69.

8. For a more detailed description of the responses by multinational companies to gray markets, see:

S.T. Cavusgil and E. Sikora, “How Multinationals Can Counter Gray Market Imports,” Columbia Journal of World Business 23 (1988): 75–85.

9. Wall Street Journal, 16 July 1992, p. 5.

10. Cross et al. (1990): 188.

11. C.I. Barnard, The Functions of the Executive (Cambridge, Massachusetts: Harvard University Press, 1968).

12. E. Kucher, Pharma-Preismanagement für Innovationen, in H. Simon, E. Kucher, and K. Hilleke-Daniel, eds., Wettbewerbsstrategien im Pharmamarkt (Stuttgart, Germany: Schäffer-Verlag, 1989), pp. 102–123; and

H. Simon and E. Kucher, “The European Pricing Time Bomb — And How to Cope with It,” European Management Journal 10 (1992): 136–145.

13. V. Govindarajan and A.K. Gupta, “Knowledge Flow Patterns, Subsidiary Strategic Roles, and Strategic Control within MNCs,” Best Paper Proceedings (Miami, Florida: Academy of Management National Meetings, August 1991), pp. 21–25.

14. W. Beutelmeyer and H. Mühlbacher, Standardisierung der Marketingpolitik transnationaler Unternehmungen (Linz, Austria: Universitätsverlag Brauner, 1986).

15. K.G. Shaeffer, “Building Global Teamwork for Growth and Survival” (New York: Conference Board, research bulletin no. 228, 1989).

16. A.J. Morrison, D.A. Ricks, and K. Roth, “Globalization vs. Regionalization: Which Way for the Multinational,” Organizational Dynamics 19 (1991): 17–29.

17. Ibid.

18. C.A. Bartlett and S. Ghoshal, Managing Across Borders: The Transnational Solution (Boston: Harvard Business School Press, 1989); and

Y.L. Doz and C.K. Prahalad, “Managing DMNCs: A Search for a New Paradigm,” Strategic Management Journal 12 (1991): 145–164.

19. A. De Meyer, “Tech Talk: How Managers Are Stimulating Global R&D Communication, Sloan Management Review, Spring 1991, pp. 49–58.

20. J.A. Quelch and E.J. Hoff, “Customizing Global Marketing,”Harvard Business Review, May–June 1986, pp. 59–68.

21. H. Raffee and R.T. Kreutzer, “Organizational Dimensions of Global Marketing,” European Journal of Marketing 23 (1989): 43–57.

22. J. Bolz, Wettbewerbsorientierte Standardislerung der internationalen Marktbearbeitung (Darmstadt, Germany: Wissenschaftliche Buchgesellschaft, 1992), p. 156.

23. T.A. Poynter and R.E. White, “Making the Horizontal Organization Work,” Business Quarterly, Winter 1990, p. 73–77.

24. C.A. Bartlett and S. Ghoshal, “Organizing for Worldwide Effectiveness: The Transnational Solution,” California Management Review, Fall 1988, pp. 54–74.

25. S. Ghoshal and N. Nohria, “International Differentiation within Multinational Corporations,” Strategic Management Journal 10 (1989): 323–337; and

K. Eisenhardt, “Control: Organizational and Economic Approaches,” Management Science 31 (1985): 134–149.

26. Bartlett and Ghoshal (1988): 56.

27. S. Ghoshal and N. Nohria, “Horses for Courses: Organizational Forms for Multinational Corporations,” Sloan Management Review, Winter 1993, pp. 23–35.

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