1. Factors Contributing to Gray Market Imports
The gray market is essentially developed from the ability of third party distributors or purchasers to exploit the profit resulted from the differentiation of market strategy in the foreign market where they legally obtained copyrighted goods. Differences in currency exchange rates, product quality and characteristics, warranties, and services offered all contribute to the gray market. Price difference may result from copyright owners’
intentional price discrimination10 in foreign market or simly be a reflection of the variation in foreign currency’s exchange rate. Those factors motivate a third party who legally bought
9 E.U. basically adopts this approach by exhausting copyright owner’s distribution right only within European Community
10 There seems to be some reasonable incentives why price discrimination is more desirable for copyright owners. Copyright owners tend to regard price discrimination as an essential tool to the success of their development and marketing efforts. It’s also an effective way to divide a copyright owners’ global market. With appropriate market segmentation, price discrimination can also benefit developing countries where most consumers can’t afford high priced copyrighted products. See John Barton, Symposium: Global trade issues in the new millennium: The economics of TRIPs: International Trade in Information-Intensive Products. 33GEO. WASH.INT'L L.REV.473 (2001)
the products abroad to ship it back to copyright owner or licensees’ domestic market and sell it in competition with the higher priced version provided by the authorized domestic distributors.
2. Benefits of Gray Market
a. Promote competition and efficiency
Advocates of gray market goods pointed out that parallel imports may provide beneficial price competition that leads to lower prices for consumers and encourage copyright owners and their licensees to find the most efficient ways to manufacture and distribute copyrighted goods, so that goods are distributed in an efficient fashion to people who are willing to pay the most for them.11
b. Increase public access to copyrighted goods, increase the overall public
welfare
Also, parallel imports may allocate resources to their best use in view of
consumer demands by offering consumers more options, the public thus gains more access to the copyrighted works, therefore increases the overall welfare for the public although it might reduce the individual copyright owner’s profits due to the lowered price resulted from more
11 See Shubha Ghosh, An Economic Analysis of the Common Control Exception to Gray Market Exclusion,15U.
PA.J.INT’L BUS.L. 373, 377 (1994); Matthew Burgess & Lewis Evans, Parallel Importation and Service Quality:
An Empirical Investigation Of Competition Between DVDs and Cinemas in New Zealand,1J.COMPETITION L.&
ECON. 747, 758
supply of copyrighted goods12.
c. Prevent copyright owner’s global monopoly power through price
discrimination in different countries
For years, one major concern for the protection of intellectual property is its potential to support monopoly pricing.13 Since copyright owners have exclusive right to reproduce the copyrighted work, there is a risk that they may reduce production in an attempt to establish monopolistic prices which, in economicists’ view, leads to the loss of “consumer surplus” represented as “deadweight loss.”14 Supporters of parallel import thus assert that, by importing lawful copies to another country, parallel imports serve the function as to reduce the deadweight loss, facilitate the dissemination of copyrighted works, and prevent the exercise of copyright owner’s monopoly power through geographic price discrimination in the global market.15
d. Break down trade barriers, equalize price globally and harmonize the
market
12 Matthew Burgess & Lewis Evans, supra 768 (Burgess and Evans’ investigation indicated that the introduction of parallel imports into the New Zealand film sector has resulted in increased overall welfare.)
13 Keith E. Maskus, Intellectual Property Rights and Economic Development, 32CASE W.RES.J.INT’L L.471, 490
14 See Alan O. Sykes, Public Helath and International Law: TRIPs, Pharmaceuticals, Developing Countires,and the “Doha” Solution,3CHI.INT’L. 47, 57
15 See Michael J. Meurer, Copyright Law and Price Discrimination, 23CARDOZO L.REV. 55 (2001) (indicating that price discrimination, which requires substantial market power, is socially undesirable. The author therefore supports the restrictions on using import right to block parallel imports.)
What’s more, from the perspective of international trade relationship, parallel imports actually help break down trade barriers established due to copyright owner’s exercise of monopoly power, serving to equalize prices globally and thus harmonizing the market.16
3. Problems of Gray Market
a. Creating intra-brand competition
However, opponents assert that parallel imports entail many problems, such as intra-brand competition.17 This competition would force the domestic exclusive licensee to lower price on the authorized goods. If copyright licensor himself also distributes the products in domestic market, he will have to compete against imports of his own products.
Since domestic licensees may be forced to cut prices in order to survive in intra-brand competition, they may therefore no longer be willing to make investment in copyrighted goods or provide service related to this product (such as warranties, pre-sale quality control) within their market area had parallel imports are allowed. In other words, gray marketing reduces the size of profits originally enjoyed and used by copyright owner/licensor to further improve the quality of goods because the intra- brand price competition diminishes the ability
16 See Ghosh, supra note 11; see ALSO JOHN H.JACKSON,WILLIAM J.DAVEY &ALAN O.SYKES,JR.,LEGAL
PROBLEMS OF INTERNATIONAL ECONOMIC RELATIONS:CASES,MATERIALS AND TEXT ON THE NATIONAL AND
INTERNATIONAL REGULATION OF TRANSNATIONAL ECONOMIC RELATIONS 961, 950 (4th ed. 2002)
17 Intra-brand competition is the competition between different distributors of the same product licensed from the same licensor. Continental T.V., Inc. v. GTE Sylvania Inc. 433 U.S. 36, 52 n.19 (1977)
of manufacturers and distributors to provide better quality products.18
b. Causing consumer confusion
Opponents also argue that it’s very likely that consumers will confuse gray market goods with the domestic authorized goods; further, because consumers might not receive any warranty protection for gray market goods, they have to bear the risk of inferior or unsafe goods, which is detrimental to the general public19.
c. Free-riding and diminishing goodwill
Parallel imports are said to free ride the exclusive domestic licensee or copyright owner’s efforts in advertisement and promotion. Those goods may even, because of their compliance with foreign regulations such as instructions in a foreign language, look or package adjusted for the targeted foreign market, reduce the goodwill attached to the original products when they appear materially different from those intended for domestic distribution.20