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Managing gray markets through tolerance of violations: a transaction cost perspective

Author

Listed:
  • Mark Bergen

    (Carlson School of Management, University of Minnesota, USA)

  • Jan B. Heide

    (School of Business, University of Wisconsin-Madison, USA)

  • Shantanu Dutta

    (Marshall School of Business, University of Southern California, USA)

Abstract

Exclusive territory distribution arrangements are commonly observed in many markets. Once deployed, such arrangements are often subject to gray market activity, in the form of unauthorized sales which violate assigned restrictions. Interestingly, however, firms frequently choose to tolerate violations, rather than pursuing complete enforcement (i.e., by terminating violators) or abandoning exclusivity entirely. We draw from the literature on transaction cost economics to propose that tolerance of gray market activity is a function of a firm's ability to detect violations, and of the existence of credible threats and commitments. We also draw on the traditional literature on exclusive territories to suggest that minimizing distributor free-riding on services, which influences the decision to use exclusive territories in the first place, continues to be a concern after deployment. We collect micro-level data and test our predictions through a survey of managers who were responsible for the distribution decisions in their respective companies. Our results suggest that tolerance of violations is influenced both by transaction cost and free-riding considerations. © 1998 John Wiley & Sons, Ltd.

Suggested Citation

  • Mark Bergen & Jan B. Heide & Shantanu Dutta, 1998. "Managing gray markets through tolerance of violations: a transaction cost perspective," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 19(3), pages 157-165.
    • Handle: RePEc:wly:mgtdec:v:19:y:1998:i:3:p:157-165
    DOI: 10.1002/(SICI)1099-1468(199805)19:3<157::AID-MDE880>3.0.CO;2-E
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    Citations

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    Cited by:

    1. Reza Ahmadi & B. Rachel Yang, 2000. "Parallel Imports: Challenges from Unauthorized Distribution Channels," Marketing Science, INFORMS, vol. 19(3), pages 279-294, March.
    2. Heide, Jan B & Dutta, Shantanu & Bergen, Mark, 1998. "Exclusive Dealing and Business Efficiency: Evidence from Industry Practice," Journal of Law and Economics, University of Chicago Press, vol. 41(2), pages 387-407, October.
    3. Mooi, Erik A. & Gilliland, David I., 2013. "How contracts and enforcement explain transaction outcomes," International Journal of Research in Marketing, Elsevier, vol. 30(4), pages 395-405.
    4. Ming Hu & J. Michael Pavlin & Mengze Shi, 2013. "When Gray Markets Have Silver Linings: All-Unit Discounts, Gray Markets, and Channel Management," Manufacturing & Service Operations Management, INFORMS, vol. 15(2), pages 250-262, May.
    5. Huang, Hongfu & He, Yong & Chen, Jing, 2019. "Competitive strategies and quality to counter parallel importation in global market," Omega, Elsevier, vol. 86(C), pages 173-197.
    6. Hara, Yoritoshi & Choi, Yonghoon, 2023. "Vertical and horizontal governance in multiple-channel systems," Journal of Business Research, Elsevier, vol. 156(C).
    7. Ayelet Israeli, 2018. "Online MAP Enforcement: Evidence from a Quasi-Experiment," Marketing Science, INFORMS, vol. 37(5), pages 710-732, September.
    8. Huang, Hongfu & He, Yong & Chen, Jing, 2020. "Cross-market selling channel strategies in an international luxury brand's supply chain with gray markets," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 144(C).
    9. Jeff S. Johnson & Ravipreet S. Sohi, 2016. "Understanding and resolving major contractual breaches in buyer–seller relationships: a grounded theory approach," Journal of the Academy of Marketing Science, Springer, vol. 44(2), pages 185-205, March.

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