To cover the import taxes, a manufacturer typically charges a higher price in a foreign market than in its domestic market. The price difference can lead to an unauthorized distribution channel, where an agent purchases products from the manufacturer’s domestic market and resells them as gray market goods in the manufacturer’s foreign market through cross-border e-commerce. Such practice is challenging to manufacturers in many sectors. We develop Stackelberg game models to investigate differentiated-pricing (setting a higher price in the foreign market) and equal-pricing (setting the same price in the domestic and foreign markets) strategies for a manufacturer who is facing an unauthorized channel. We find that the optimal pricing strategy of the manufacturer is influenced by the following critical parameters: consumers’ acceptance degree of gray market product, the import tax on the manufacturer’s authorized product, and the tax incentives for cross-border e-commerce. When the three parameters are high, an unauthorized channel can benefit the manufacturer, and a differentiated-pricing strategy should be adopted to encourage an unauthorized channel. When the three parameters are somewhat low, an unauthorized channel is harmful to the manufacturer, but a differentiated-pricing strategy should still be adopted to allow an unauthorized channel. However, when the three parameters are very low, it is better for the manufacturer to adopt an equal-pricing strategy to deter a harmful unauthorized channel.
Published July 2023 , 28 pages
G2324.pdf (3 MB)