GMAT Exam Dumps : Graduate Management Admission Test (2022)

Manufacturers and retailers tend to look askance at gray markets, where products are sold at cut-rate prices outside their authorized distribution channels. Manufacturers fear that gray markets will undercut margins and tarnish brand names. Retailers fear that they will siphon away customers and erode prices.

A new study indicates, however, that gray marketing actually benefits manufacturers and retailers in markets that meet two criteria: first, sharp differences exist in consumers' price sensitivity; second, large numbers of consumers are price-insensitive. In such markets, the low prices of the gray market will attract the most price-sensitive customers. The authorized channels will then compete only for the remaining customers—those who are insensitive to price but sensitive to service.

When that happens, the structure of competition and the economics of the market shift. The authorized retailers, freed from having to cater to the bargain hunters, can raise their prices and focus on service. If the concentration of price-insensitive shoppers is high enough, the resulting increase in prices will more than offset the loss of sales to the bargain hunters. The margins and profits of the authorized retailers will increase, and manufacturers will, as a result, be able to boost their wholesale prices.

Salespersons have employed two major sales tactics in order to influence customers to make relatively high-priced selections when presented with sequenced product lines (lines with graduated attributes and prices). The top-down tactic begins by presenting information on the highest-priced model and descends down the product line, explaining the sacrifices made with each step down. The way people use decision heuristics (rules of thumb) to simplify complex, information-rich decision tasks may explain the success of top-down selling. The "anchoring-and-adjustment" theory suggests that such mental shortcuts can systematically bias the decision outcome, as decision-makers start from an initial value or anchor point and adjust to yield a final decision.

The bottom-up sales tactic starts by presenting the lowest-priced model as the reference point and steps up to higher-priced models. Salespersons seek to communicate that the more expensive item is actually a better value. But nothing in the decision-heuristics literature supports the bottom-up strategy as an effective tactic, and to the extent that the anchoring-and-adjustment theory explains the effectiveness of top-down selling, it suggests that the bottom-up tactic should be ineffective. Furthermore, some psychologists suggest that customers may attribute less honesty and credibility to a salesperson who is trying to step them up the product line to a more expensive model; if true, this could limit the tactic's effectiveness.