A very good afternoon to everyone, today my group will be presenting on the

problem of demand uncertainty faced by retailers.

Our group researched on 10 relevant journals and we have categorized them into
Ordering Policy and Importance of Asymmetric Information.
For todays presentation, the first journal will discuss about the gray market problem
while the second and third journal will provide potential solutions to the gray market
problem
Before we begin, here are some key definitions for the first journal:
1. Authorized retailers refer to the channel retailers intend to sell their product
at
2. Unauthorized retailers refer to the channel used to sell diverted inventory
surplus at a markdown price
3. Gray markets refers to the summation of all existing unauthorized channels
The journal aims to explore the impacts of gray market on authorized retailers by
comparing across 3 different models. The first model consist of only producers and
authorized retailers, the second model consists of an additional unauthorized
channel, while the last model adds an additional salvage channel.
Assumptions made include:
1.
2.
3.
4.

Prices are exogenous

Demand is uncertain
Demand in both channels are correlated
Markets are competitive

Gray market arises when authorized retailer makes a single purchase order based
on forecasted demand. Inventory surplus is then diverted to unauthorized channels
(which form a gray market) then to salvage channels.
Research results reveal that existence of gray market lower future sales volume for
the authorized retailers and they may lose out on price competitiveness.
The research also concluded on how different factors affect the quantity diverted.
The first factor would be the market size. The expected quantity diverted is:
1) Independent of expected authorized demand (denoted by lambda a), BUT
2) Increases with expected unauthorized demand (denoted by lambda U)
The second factor would be the profit margin levels. Expected quantity diverted
will
3) Increase with profit margins of all 3 channels
Last but not least, increase demand uncertainty in both authorized and
unauthorized channels will increase the quantity diverted if inventory level in
authorized channel is greater than total demand in both markets.

With that, Ill now pass the time to wanyu who will then discuss about the article I
just reviewed.

Explanation for the results on qty

diverted:
The expected quantity diverted will:

Remain constant for expected

authorized demand (denoted by
lambda a), regardless of
whether the authorized demand
increase or not.
Given expected authorized
demand, if the expected
authorized demand were to
increase, then the authorized
retailers will also increase the
qty they order from producers,
thus absolute qty diverted will
still remain contant

Increases with expected

unauthorized demand (denoted
by lambda U)
If expectation of unauthorized
demand increases, then qty
diverted will surely increases as
there would be a larger sales
volume there, more qty will
then be diverted to profit from
the larger sales volume

Increases with profit margins of

all 3 channels
With higher profit margins
across all 3 channels, order
more to make sure got surplus
to divert so as to earn from both
channels. Producers will also be
more willing to produce more
Last and most importantly, demand
uncertainty also affect the amount of
quantity diverted.

Increases with unauthorized

demand uncertainty if total
inventory > (total demand in
both markets)
Increases with authorized
demand uncertainty if total
inventory > (total demand in
both markets)
Demand uncertainty increase
forecast deviate more from
actual demand inventory
level higher than combined
demand more surplus
more qty diverted