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The legal diversion of large quantities of goods from authorized distribution channels to unauthorized or "Gray market" channels has important consequences to both firms and consumers through issues such as revenue generation, price erosion, service and warranty availability and cost, and product availability. Unlike previous research, which has focused on pricing issues, author considers how gray market activity is driven by the uncertainty that surrounds inventory ordering decisions. Paper analyzes a stochastic supply chain model of a manufacturer, distributor, and retailers in which the distributer and the authorized retailer have the option of diverting inventory to a gray market. This analysis yields new insights into gray market behavior and results that can inform management strategies and policies for confronting gray markets.
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