Crime in Business. Grey market products and EU-legislation

Seminar Paper 2002 19 Pages

Business economics - Law



1. Introduction

2. General aspects
a. Definition
b. Conditions for the development of gray markets

3. Gray markets in practice
Pharmaceutical gray markets
Parallel import of pharmaceuticals in the European Union

4. Legal background violations
a. Regulation of parallel trade in the European Community Treaty
b. European Court of Justice’s decisions
Consequences and effects of these ECJ decisions

5. Countermeasures

6. Effects resulting from the existence of gray markets

7. Examples

8. Conclusion

9. Bibliography

10. Appendix

11. Glossary

1. Introduction

“Gray markets are significant as they now exceed $10 billion per year in North America and affect almost every major-trademarked product (Grenier, 1998). Gray markets are growing at more than 22 per cent annually (Lowe and McCrohan, 1988) and expect further growth as export operations increase (Myers, 1999).”[1]

When reading these lines one can presume that gray market activities are an inevitable result of the export of trade marked goods. Since exports are increasing steadily there are several attempts to restrain these semi-illegal activities.

In the following I will give a short and general overview of the existing gray markets (definition and conditions). Furthermore, I will focus on the pharmaceutical industry which I consider the most interesting, even if dangerous. After a short description of possible gray market activities in this industry within the European Union I will enumerate some of the most important measures and regulations that are being taken against this serious problem. Finally, I will mention the negative as well as possible positive effects of gray markets, on both the producer and the consumer.

2. General aspects

a. Definition

“Gray market products are

- genuine trademarked items
- imported legally
- through unauthorised international distribution channels

i.e. without the domestic trademark holder’s authorisation”[2]

When dealing with gray markets in general it has to be stated that it is not the legality of the product that is questioned but the legality of its distribution. Consequently, the trademark holder has to compete against an unauthorized distributor in his domestic market, i.e. paradoxically against his own trademarked items.

One can imagine the negative impact this has on the international company concerned:

Firstly, customers’ goodwill is destroyed as the consumer may be disappointed by the occasionally occurring inferior quality (warranty, safety protection, service,…) of parallel imports which they bought without being aware of the distributor’s lack of authorization. Secondly, authorized distributors have then no incentive to promote their (i.e. the trademark holder’s) products. As a result, sales may decrease considerably.

It becomes evident that this is not only an issue of “illegal” distribution but also one of patent and trademark law.

b. Conditions for the development of gray markets

“It appears that the current gray market is caused by a different set of circumstances, primarily over supply - too many goods chasing too few customers.”[3]

But it is not simply a matter of the conditions enabling the development of gray markets. They are a much more complex issue. The background is much wider and has to be described step by step.

“In general, there are three prerequisites for the evolution of gray markets: (1) gray marketers must have a source of supply, (2) trade barriers between countries must be low enough to provide easy access from one market to another, and (3) price differentials must be large enough to appeal to the profit motives of gray marketers.”[4]

As long as there is a source of supply gray market activities will exist and even expand. Authorized distributors will not cease selling products to anyone demanding to buy them, including gray market distributors.

Low or even practically non-existing trade barriers, as for example established within the European Union, provide an ideal background for gray marketers (on which I will focus in section 3. and 4.)

As transaction and transportation costs have much influence on price differentials, I think we can safely suggest that they play the key role in the pricing strategy of an enterprise as well as in the development of gray markets.

If transportation costs are high, gray marketing would not take place. The same goes for transaction costs; but the latter are not as relevant to the gray marketer as they are to the manufacturer. The producer has to decide on the ideal number of distribution outlets after considering demand in one particular region, his own marketing strategy and the costs of the outlets mentioned above.

The manufacturer has a much more complex decision to take whereas the gray marketer’s is a simple task. The latter has only to find an authorized distributor in country A, buy the products and resell them in country B. The only factors that determines his decision are the prices in country A and the transportation costs from country A to country B. If these costs are relatively low, gray markets are inevitable.

3. Gray markets in practice

Theoretically, every trademarked item distributed to agents abroad can be subject to gray market activities. Most common are electronic devices (sold for example on 42nd Street in New York, which I have experienced personally), cars (limited-edition Mercedes-Benz), glasses (Hartlauer buying glasses in Bulgaria) and pharmaceutical products. I can not deal with every item being subject to gray market activities, which is the reason why I decided to concentrate on pharmaceutical gray markets in the European Union.

Pharmaceutical gray markets

When considering the pharmaceutical industry one has to bear in mind that there are not only gray market products but also generic products that increase competition. Generic products are not the real trade-marked thing, they are called by their chemical names, whereas a manufacturer assigns a brand name. These products have the same ingredients (i.e. generically and therapeutically equivalent)

“Some drugs are protected by patents and are supplied by only one company. However, when the patent expires, other manufacturers can produce its generic version. Currently, about half the drugs on the market are available in generic form.”[5]

Parallel import of pharmaceuticals in the European Union

“The creation of the [European] Community has highlighted the conflict between competition on the one hand, and monopoly granted through the issuance of Intellectual Property Rights (IPRs) on the other. Nowhere, perhaps, has this conflict been more actively pursued through the courts (both national and European) than by the manufacturers of branded medicines.”[6]

For the gray market is estimated to value up to 10% of the total market for prescription medicine, the European Court of Justice (ECJ) has already taken a lot of measures in order to combat the evolution of pharmaceutical gray markets within the European Union (EU). (Since the EU has been very much influenced by the Anglo-Saxon law system, it has adopted the so called “case law system”, i.e. the Court judges upon cases, i.e. interprets regulations and law judicially. These verdicts become legally binding not only for the accused party but it has to be referred to them in every following, similar trial/case. The principle idea behind this is to allow the law system to develop, to be “up to date” and to be more flexible although, individual.)

Firstly, one has to know how a price for prescription medicine is calculated. There are four “price control mechanisms:

- cost-plus
- reference pricing
- profit control
- country of origin”[7]

Apparently the country of origin, as well as the reference price of similar products, determine the pricing strategy of a manufacturer to a large extent.

According to the pharmaceutical magazine SCRIP[8], the EU countries can be grouped into three categories regarding the retail price level for prescription medicine:

- above-average prices: Germany, Denmark and the Netherlands
- intermediate prices: Ireland, the United Kingdom and Belgium
- below-average prices: Greece, Italy, France, Spain and Portugal[9]

As already mentioned in chapter 2 b, one of the necessary prerequisites for the development of gray markets is a price differential large enough to allow considerable profit. According to a study on the status of gray markets in the pharmaceutical industry conducted in 1991 for the
European Commission, “the necessary price differentials required to attract parallel traders must be at least 15%.”[10]


[1] http://www.managementfirst.com/international_marketing/art_gray_market.htm

[2] http://www.managementfirst.com/international_marketing/art_gray_market.htm

[3] http://www.aednet.org/ced/mar98/market_lines.htm

[4] http://www04.homepage.villanova.edu/peggy.chaudhry/gray.htm

[5] http://www.ftc.gov/bcp/conline/pubs/health/generic.htm

[6] SCRIP – pharmaceutical magazine n.d. PJP Publications Ltd., 2002, BS 1069

[7] http://www04.homepage.villanova.edu/peggy.chaudhry/gray.htm

[8] http://www.pjbpubs.com/cms.asp?pageid=152

[9] http://www04.homepage.villanova.edu/peggy.chaudhry/gray.htm

[10] http://www04.homepage.villanova.edu/peggy.chaudhry/gray.htm


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Vienna University of Economics and Business – Institute for Business English
Crime Business EU-legislation



Title: Crime in Business. Grey market products and EU-legislation