Gray marketing as an alternative market penetration strategy for entrepreneurs: Conceptual model and case evidence

Gray marketing is said to occur when authentic branded products reach the c onsumer through marketing channels other than that of the authorized distri butor (Weigand 1991). Free-riding was first of offered by Tan ct al. (1995, 1997) as an alternative explanation for the occurrence of gray marketing W e extend the authors' work to show that free-riding can be an alternative s trategy to niching for entrepreneurs contemplating entry into established m arkets. Almost exclusively, the existing literature on gray marketing treats the ph enomenon as a pricing problem and fails to recognize it as a market entry o pportunity for start-up entrepreneurs. The gray marketing strategy is appro priate for start-up entrepreneurs in view of their their resource limitatio ns and the risk of being a first-mover in market development. We show in th is paper that an entrepreneur can successfully penetrate an established mar ket by following a gray marketing strategy. This is because it can be optim al for the incumbent supplier to accommodate the entrepreneur/gray marketer if the former could force the latter out of the market through aggressive counter actions. We developed a conceptual model using game theoretic concepts to aid entrep reneurs in understanding the strategic interactions amongst parties involve d in gray marketing and to identify the conditions under which entrepreneur s can successfully penetrate a market via gray marketing. The deductive or game theoretic approach, we feel, is most appropriate because gray marketin g involves multiple-party inter-actions and conflicts of interests. As Moor thy (1985) showed, the game theoretic methodology is most suited to analyzi ng the behavior of market participants in such a situation. This paper identifies the conditions under which gray marketing would be pr ofitable and sustainable for entrepreneurs. First, by targeting markets tha t are already well established by the larger firms, the entrepreneurs' risk of failure due to demand uncertainty is reduced. In addition, they need no t incur substantial costs for market developmental efforts. Furthermore, th e free-riding strategy provides entrepreneurs with the opportunity to enter profitable markets that are currently supplied by larger firms, instead of being restricted to markets ignored or distained by the latter. Second, en trepreneurs are able to benefit from the second-mover advantages in followi ng the free-riding strategy. As late entrants into the market, entrepreneur s could learn from the experiences of the larger firms and avoid costly mis takes. By imitating the product strategy of the larger firm, entrepreneur's could also achieve cost savings in R&D and product development costs. All these effectively reduce the entrepreneur's cost of entry into the market. Hence, even with limited resource at their disposal, entrepreneurs could st ill enter the market successfully. Finally, by following the free-riding st rategy, entrepreneurs are able to "nibble" at the market shares of the larg er firms. This is possible because of the difficulties and costs faced by t he larger firms in countering entries made by the entrepreneurs. Thus, the larger-firms are left with little choice but to accommodate the entry of th e entrepreneurs into the market. When the costs of countering the entrepren eurs' entry are sufficiently large, the free-riding strategy becomes feasib le for entrepreneurs even if they do not posses competitive advantages over the larger-firms. Our paper thus demonstrates that entrepreneurs do have an alternative marke t entry strategy besides the commonly prescribed niching strategy. It also shows them when such a free-riding strategy would be most benificial and mo st likely to succeed. These are further illustrated and supported through t wo real-life cases involving companies in the luxury cars and cosmetics ind ustries in Singapore. (C) 2001 Elsevier Science Inc.