Gray market has been widely regarded as potential erosion to authorized channel members to sell the authentic products. To mitigate its eroding effect, existing literatures of this institutional practice has heavily worked on the distribution channel management. However, very limited studies dig into the essential origin to dispel the risk of gray market. This paper investigates how and when the gray market derives in a two independent retailing channel extant, and analyzes the production and market factors which the gray market depends on. Meanwhile, we investigate the impact of gray market on the incumbent retailer and the entry retailer. A key finding is that the retailer in the high-level market can weaken the effect of gray market on its retailing channel.
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