Effects of IoT technology on gray market: An analysis based on traceability system design

Abstract Gray market emerges when the retailer diverts product from a lower-price market to a higher-price market without the manufacturer’s permission. Internet of Thing (IoT) technology enables the manufacturer to track gray-product distribution and monitor gray market activity. In this paper, we aim to introduce IoT technology into gray market management and investigate the impact of IoT technology on gray market and firms' profits. First, we design an IoT-based traceability system which realizes the real-time monitoring of gray market activity. Based on the IoT-based traceability system, then we consider the manufacturer’s two coping strategies and establish three game models to examine how IoT technology affects gray market and firms’ profits. Finally, we present the numerical simulations to perfect and supplement our findings. We find that IoT technology has significant implications which can inhibit gray market. However, it is not always beneficial to the manufacturer or harmful to the retailer. If the manufacturer takes an appropriate coping strategy, a win-win situation can be achieved.

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