Countering grey market threat using service effort

Grey markets are likely when there is a significant price difference of the same product in two different markets. A grey marketer can buy the product in the low-price market and sell it in the high-price market starting an unauthorised channel. This paper studies the role of service effort in the authorised channels in fighting grey market under two scenarios. One is when the prices are not under the manufacturer's control and second, when they are. We find that the manufacturer's profit is significantly improved when he proactively adjusts the service levels in different markets. When service provision can be used in conjunction with pricing strategies, the manufacturer's profit is further improved. One surprising finding is that, when certain conditions are satisfied, the manufacturer actually benefits more from grey market than from the authorised channel in the high price market.