What is Grey Market?
The grey market is the selling of legal goods through distribution channels that are not authorized by the manufacturer of the goods. Thus, it involves unauthorized dealers selling original products without the consent of the manufacture.
However, you should not confuse the grey market with the black market. The sale of grey goods is not official but not illegal.
The grey market is often referred to as the parallel market as it creates price differentiation of the goods in the market.
Through a grey market, you can buy an original product at a lower price than an authentic source. Thus, the grey market leads to a number of advantages from the perspective of a consumer and an authorized dealer or manufacturer.
One of the common grey markets is security grey market. In such markets, a company’s shares are traded before they are issued in an initial public offering (IPO).
In this article, the advantages and disadvantages of grey market from the perspective of a consumer are discussed.
Advantages of Grey market
The consumer can avail the following advantages of the Grey market.
1. Lower Price
The consumer can purchase the same product at a lower price. Hence, the grey market offers a price advantage to the consumers.
The grey goods are authentic even if they are supplied through an unauthorized dealer. Thus, the consumer has to spend a lesser amount on the ordinal product.
Since the dealers source the grey goods from VAT-free countries, the consumer can further enjoy substantial discounts on bulk orders.
Grey market can easily counter blocked distribution. Some manufacturer limits its distribution channel beyond geographical borders.
Therefore, those products are not available in the market in a specific country. In such cases, the consumer access to these products through the grey market.
Moreover, the consumer can easily access grey goods online. The purchase and payment of the goods can be made through online transactions using debit or credit card.
Even though the consumer buys grey goods from unofficial sources, the products are authentic.
Unlike the black market, the aspect of reliability is still consistent for the grey market.
4. Sales Target
In some cases, the grey market helps to meet the sales target and retrieve the cost of the product.
The manufacturing company may pressurize the dealers for meeting high sales target. Under these circumstances, the dealer sells off the product at a lower price in the grey market to meet the sales target.
Disadvantages of Grey market
The grey market is also followed by some disadvantages, such as
1. Lack of Warranty
Even though the products are original, the dealer cannot provide any warranty. Thus, the consumer may have to spend out of his pocket for any repair or replacement.
2. After-sales support
Unlike licensed dealers, the grey market dealers do not assure any after-sales service. Therefore, the consumer does not receive any after sales service. Thus, it is one of the major disadvantages of purchasing grey goods.
3. Quality Assurance
It is difficult to differentiate between grey goods and authentic products. The consumer cannot realize that grey goods purchased is a used one or a new one. Thus, the grey market does not provide any quality assurance of the products.
4. Effect on Economy
Since grey goods are smuggled, the products are duty-free. Thus, the grey goods are related to a million of uncollected tax and duties. Therefore, it is basically draining the economy.
How is Grey market a Disadvantage to the Manufacturer?
The grey market has an impact on the manufacturer’s business in the following ways.
1. Profitability Hampered
The flow of the manufacture’s product into the grey market affects profitability.
The pricing of the product depends on different vital parameters. Profit is one of the vital parameters.
But the same products have lower prices in the grey market. Thus, it evidently hampers the profitability of the manufacturer.
2. Affects Brand Reputation
The grey goods do not provide warranty or after-sales service. Thus, if any issue arises in the product, the brand reputation is affected.
3. Multiple pricing in the Market
As the grey market deals with the same product at a lower price, the manufacturer has to deal with problems due to multiple pricing in the market.
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Advantages and Disadvantages of IPO Grey market
The IPO Grey market operates as a closed market outside the purview of SEBI regulations. Thus, there is a significant risk factor for those buying IPO stocks in the Grey market.
- The investor can get the shares quickly
- As the IPO prices are fluctuating wildly in the grey market, you may get the opportunity to purchase the stocks at a lower price
- As the grey market is an unofficial platform, you do not need to follow the rules and regulations set by SEBI.
- The Grey IPO premium might be higher than the official price. Therefore, there is a chance that you end up paying more for the IPO stocks.
- As there are no official bodies involved in this type of trading, the investors may be fooled by frauds.
The Grey markets sell licensed products through unofficial channels. Thus, one should be very cautious when dealing with such markets. There are higher chances of trick and fool in the grey market.
Stockquantum was founded by Dharmendra Mukati in 2018. I am a Trader and Investor in the last 10 years.
I am writing here about stock broker review, broker comparison, IPO investment, Crypto currencies, technical analysis, fundamental analysis, sub brokership, mutual fund, personal finance, and our experiences.