The grey market refers to the flow of goods through distribution channels other than those authorized by the manufacturer or producer. Unlike those on the black market, grey market goods are not illegal. Instead, they are being sold outside of normal distribution channels by companies which may have no relationship with the producer of the goods. Frequently this occurs when the price of an item is significantly higher in one country than another. This situation commonly occurs with cigarettes, electronic equipment such as cameras, and wine. Importing certain legally restricted items like prescription drugs probably would be categorized as black market. A company will then buy the item, possibly at the retail price, and import it into a different country. Other times a grey marketer will purchase directly from an authorized distributor.
Warranties and grey market goods
Typically the manufacturer will refuse to honor the warranty of a item purchased from grey market sources, on the grounds that the higher price on the non-grey-market reflects a higher level of service. This is particularly evident in electronics goods. Manufacturers may give the same model different model numbers in different countries even though the functions of the particular machine are identical. When a manufacturer identifies a particular product as not destined for that particular country the purchaser can then only seek warranty service 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. As there is no privity of contract between the manufacturer and consumer neither the implied warranty of fitness nor the implied warranty of merchantability apply to grey market goods.
The grey market in wine
The grey market in wine flourishes, particularly in the case of champagne. Many large champagne producers do their own importing, and desire to maintain independent price points in different markets. Thus a bottle of Champagne might cost US$35 in the United States while the same bottle might be only 20 Euros in France, for marketing purposes. It is often profitable to buy the wine in Europe, typically from an authorized distributor, and resell it in the U.S. In the case of enormous pricing disparity, it is not uncommon to find a grey marketed wine selling for less at retail than the wholesale price of the authorized distributor. In the case of a large availability disparity between the U.S. and Europe, the grey market price may be the same or higher than the authorized price.
Typically the importer of a wine is the one who worries the most about grey market sources. The winemaker may or may not care what happens to the wine after it is sold, although he or she might complain to appease an importer.
The existence of the grey market is an example of the economic practice called arbitrage.
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