Manufacturers and retailers tend to look askance at gray markets, where products are sold at cut-rate prices outside their authorized distribution channels. Manufacturers fear that gray markets will undercut margins and tarnish brand names. Retailers fear that they will siphon away customers and erode prices.

Manufacturers and retailers tend to look askance at gray markets, where products are sold at cut-rate prices outside their authorized distribution channels. Manufacturers fear that gray markets will undercut margins and tarnish brand names. Retailers fear that they will siphon away customers and erode prices.

A new study indicates, however, that gray marketing actually benefits manufacturers and retailers in markets that meet two criteria: first, sharp differences exist in consumers’ price sensitivity; second, large numbers of consumers are price-insensitive. In such markets, the low prices of the gray market will attract the most price-sensitive customers. The authonzed channels will then compete only for the remaining customers―those who are insensitive to price but sensitive to service.

When that happens, the structure of competition and the economics of the market shift. The authorized retailers, freed from having to cater to the bargain hunters, can raise their prices and focus on service. If the concentration of price-insensitive shoppers is high enough, the resulting increase in prices will more than offset the loss of sales to the bargain hunters. The margins and profits of the authorized retailers will increase, and manufacturers will, as a result, be able to boost their wholesale prices.

The primary purpose of the passage is to
A . explain how, in certain types of markets, gray marketing can improve margins and profits for manufacturers and authorized retailers
B . identify the effects, both beneficial and detrimental, that gray markets have on manufacturers and authorized retailers
C . outline a course of action that manufacturers and authorized retailers can take to gain benefits from gray marketing
D . present the results of a study that indicates that under most conditions gray markets are beneficial to manufacturers and authorized retailers
E . provide arguments for and against the view that gray markets are beneficial to manufacturers and authorized retailers

View Answer

Answer: A