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What is the Gray Market?

By O. Wallace
Updated May 16, 2024
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The gray market, while not illegal like the black market, involves the sale of goods through means other than what was intended or approved by the original maker of a product. A private person or business purchases the good at retail, wholesale, or a discounted price, and attempts to resell it legally at a higher price. The list of things that can be sold this way is endless, but popular items include electronics, photographic equipment, cigarettes, DVDs, and wine. The term can also be used to refer to the securities market, where it defines the buying and selling of securities that will be issued at some point in the future.

It is extremely difficult to track the gray market because, once a good is sold to an unauthorized dealer, the manufacturer has no way of tracking the sale of it. This market exists just about everywhere. In the suburbs, one prime example is the snack stand at a high school football game. In an effort to raise money, the student council may purchase soda, hot dogs, and chips at a wholesale warehouse store, then sell them for a profit at the game. Another good example is when someone buys goods at a garage sale or outlet store and resells them on an online auction site at a higher price.

Under some circumstances, different countries have different markets for different goods. When a person takes advantage of the disparity in market prices of a particular good, it is called arbitrage. An arbitrageur takes advantage of this disparity by buying a good in a country where it is significantly cheaper, then reselling it legally in another country where he can demand a higher price.

One drawback of the gray market is that many manufacturers will not honor warranties on electronics purchased through it. Because the good is not purchased through “authorized” channels, manufacturers refuse to spend the money to honor the warranty. One of the ways that manufacturers identify items resold this way is by putting different model numbers on the same product in different countries. When someone calls for warranty issues, the manufacturer can identify whether their product was sold in the correct country. The warranty cannot usually be enforced, because it was sold through a third party in a different country.

Authorized agents and sellers are most often financially affected by the gray market, because they lose business to unauthorized sellers. Local laws can help or hurt this market. In some cases, food is difficult to resell because local laws dictate packaging, so what is legal in one state or country may not be in another. In an effort to curb the resale of DVDs and DVD players, DVD region codes are written onto the disc for the specific geographical area it is supposed to be sold in. Only the DVD players intended for sale in that area can play these DVDs.

Low tariffs and free trade are beneficial to the gray market, but manufacturers and big business lobby constantly to enact laws to make it difficult for sellers to do business. This, coupled with advances in technology, make the most popular goods difficult to resell.

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Discussion Comments
By vigilant — On Dec 16, 2012

When I was in college I cooked up a scheme with a friend of mine to buy these cheap Russian versions of American cigarettes and sell them at a mark up to our friends that smoked. The price we sold them for was cheaper than anywhere you could find them in town, and even though the cigarettes did not taste quite the same, they were not that bad.

We did a pretty good business for a few months but we were young and irresponsible and eventually we spent up all the money and couldn't afford to buy more cigarettes. Probably best we gave that up anyway.

By jonrss — On Dec 16, 2012

I used to make a lot of mix CDs and give them to my friends. Would this be considered a grey market activity?

Technically it is not illegal, but I was distributing music without returning any of the profits to the artists. I am not hung up on this, just curious.

By anon199255 — On Jul 22, 2011

Can a cosmetic company stop you from reselling their product online if you have paid for it, haven't opened it, and it hasn't expired?

By surfNturf — On Aug 05, 2010

Sunny27- I think Dateline did a show regarding the camera gray market shops in New York City. Many of the cameras were defective, but they were sold as new.

By Sunny27 — On Aug 05, 2010

Moldova- I didn’t know that. I usually just try to buy clothes at outlet stores and nothing else. I also think that the camera grey market is huge.

I would never buy a gray market camera because like the writer said most manufacturers will only provide warranties for cameras sold at one of their authorized dealers.

The reason for this is because the manufacturer can not verify that the camera had all of its original parts to begin with.

They don’t know if the original product was altered in some way. It is best to purchase from a well known retailer that will honor the warranty or even allow a return or exchange of the product.

There are a lot of gray market Nikon and gray market Canon cameras out there.

By Moldova — On Aug 05, 2010

Sometimes cosmetics can fall into gray market goods. Many cosmetics products are often sold at unauthorized stores. Most of these high-end cosmetics lines have authorized distributors in exclusive department stores.

However, it is not uncommon to see some of these cosmetics product sold at outlet stores. Many times these unauthorized dealers sell out of date or expired merchandise.

Consumers think that they are getting a deal because the price is substantially lower than what they pay at the store, but what they don’t realize is that are receiving substandard merchandise.

It is really difficult for cosmetic companies to track gray markets, but they do hurt their image.

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