A grey market or gray market is the trade of a commodity through distribution channels which, while legal, are unofficial, unauthorized, or unintended by the original manufacturer. In contrast, a black market is the trade of goods and services that are illegal in themselves and/or distributed through illegal channels, such as the selling of stolen goods or illegal items such as heroin or unregistered handguns.

The two main types of grey market are imported manufactured goods that would be normally unavailable or more expensive in a certain country and unissued securities that are not yet traded in official markets. Sometimes the term dark market is used to describe secretive, unregulated (though often technically legal) trading in commodity futures, notably crude oil in 2008[1]. This can be considered a third type of "grey market" since it is legal, yet unregulated, and probably not intended or explicitly authorized by oil producers.

[edit] Description

Unlike black market goods, grey-market goods are not usually illegal. Instead, they are sold outside normal distribution channels by companies which may have no relationship with the producer of the goods. Frequently this form of parallel import occurs when the price of an item is significantly higher in one country than another. This situation commonly occurs with electronic equipment such as cameras. Entrepreneurs buy the product where it is available cheaply, often at retail but sometimes at wholesale, and import it legally to the target market. They then sell it at a price high enough to provide a profit but under the normal market price. International efforts to promote free trade, including reduced tariffs and harmonized national standards, facilitate this form of arbitrage whenever manufacturers attempt to preserve highly disparate pricing. Because of the nature of grey markets, it is difficult or impossible to track the precise numbers of grey-market sales. Grey-market goods are often new, but some grey market goods are used goods. A market in used goods is sometimes nicknamed a Green Market.

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. A related concept is bootlegging, the smuggling or transport of highly regulated goods, especially alcoholic beverages. The term "bootlegging" is also often applied to the production or distribution of counterfeit or otherwise infringing goods. Grey markets can sometimes develop for select video game consoles and titles whose demand temporarily outstrips supply and the local shops run out of stock, this happens especially during the holiday season. Other popular items, such as dolls can also be affected. In such situations the grey market price may be considerably higher than the manufacturer's suggested retail price. Online auction sites such as eBay have contributed to the emergence of the video game grey market.

[edit] Responses

The parties most concerned with the grey market are usually the authorized agents or importers, or the retailers of the item in the target market. Often this is the national subsidiary of the manufacturer, or a related company. In response to the resultant damage to their profits and reputation, manufacturers and their official distribution chain will often seek to restrict the grey market. Such responses can breach competition law, particularly in the European Union. Manufacturers or their licensees often seek to enforce trademark or other intellectual-property rights against the grey market. Such rights may be exercised against the import, sale and/or advertisement of grey imports. In 2002, Levi Strauss, after a 4-year legal fight, prevented UK supermarket Tesco from selling grey market jeans.[2] However, such rights can be limited. Examples of such limitations include the first-sale doctrine in the United States and the doctrine of the exhaustion of rights in the European Union.

When grey-market products are advertised on Google, eBay or other legitimate web sites, it is possible to petition for removal of any advertisements that violate trademark or copyright laws. This can be done directly, without the involvement of legal professionals. eBay, for example, will remove listings of such products even in countries where their purchase and use is not against the law. Manufacturers may refuse to supply distributors and retailers (and with commercial products, customers) that trade in grey-market goods. They may also more broadly limit supplies in markets where prices are low. Manufacturers may 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. Alternatively, they may provide the warranty service only 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. This response to the grey market is especially evident in electronics goods. Local laws (or customer demand) concerning distribution and packaging (for example, the language on labels, units of measurement, and nutritional disclosure on foodstuffs) can be brought into play, as can national standards certifications for certain goods.

Manufacturers may give the same item different model numbers in different countries, even though the functions of the item are identical, so that they can identify grey imports. Manufacturers can also use batch codes to enable similar tracing of grey imports. Parallel market importers often de-code the product in order to avoid the identification of the supplier. In the United States, courts have decided that decoding which blemishes the product is a material alteration, rendering the product infringed. Parallel market importers have worked around this limitation by developing new removal techniques.

The development of DVD region codes, and equivalent regional-lockout techniques in other media, are examples of technological features designed to limit the flow of goods between national markets, effectively fighting the grey market that would otherwise develop. This enables movie studios and other content creators to charge more for the same product in one market than in another or alternatively withhold the product from some markets for a particular time. Consumer advocacy groups argue that this discrimination against consumers—the charging of higher prices on the same object simply because of where they happen to live—is unjust and anti-competitive. Since it requires governments to legislate to prevent their citizens from purchasing goods at cheaper prices from other markets, and since this is clearly not in their citizens' interests, many governments in democratic countries have chosen not to protect anti-competitive technologies such as DVD region-coding.