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IMR
21,6 Consumer attitude toward gray
market goods
Jen-Hung Huang
598 National Chiao Tung University, Department of Management Science,
Hsinchu, Taiwan
Submitted March 2002 Bruce C.Y. Lee
Revised November 2002 Department of Management Science and Department of International Trade,
Accepted March 2003 National Chiao Tung University, Ta-Hwa Institute of Technology,
Hsinchu, Taiwan, and
Shu Hsun Ho
Hsuan Chuang University, Hsinchu, Taiwan

Keywords Intangible assets, International marketing, Supply chain management,

Consumer behaviour
Abstract Gray market activities have become global, occurring not only in less developed or
volatile markets, but also in many well-developed markets. Although the gray market problem has
been discussed in the literature, pertinent research from a demand perspective remains scarce.
This study establishes a valid measure of consumer attitude toward gray market goods and
investigates the relationships between consumer attitude toward gray market goods and their
antecedents. Data analysis reveals that both price-quality inference and risk averseness
significantly and negatively affect consumer attitude toward gray market goods. Strategies for
managers of international brands to address gray market problems are presented.

Introduction
Managers of international brands must learn the necessary skills to promote their
brands, and solve problems in international markets. Upsetting pricing stability,
destroying marketing channels and damaging brand images are reported problems in
gray markets, experienced by managers of international brands (Alberts, 1992;
Cespedes et al., 1988). As defined by Bucklin (1993), “Gray market goods are genuinely
branded merchandise distinguished only by their sale through channels unauthorized
by the trademark owner.” Since the 1980s, retail sales of gray market goods have been
estimated at up to $10 billion per year in the USA (Alberts, 1992). For certain brands of
watches and other fine merchandise, market shares of gray merchandise have been
reported to be as high as 40 percent (Bucklin, 1993). According to Palia and Keown
(1991), who surveyed US companies that exported to Asia and had a sole agent there,
29 percent of these sole agents were experiencing problems of parallel distribution, 64
percent had problems of parallel imports’ being sold at a lower price and 77 percent
had attempted to solve these problem without success. In a recent survey, Myers (1999)
International Marketing Review discovered that gray market activity has become global, occurring not only in less
Vol. 21 No. 6, 2004
pp. 598-614 developed or volatile markets, but also in many well-developed markets. According to
q Emerald Group Publishing Limited
0265-1335
his survey of US manufacturing exporters, almost 20 percent of respondents stated
DOI 10.1108/02651330410568033 that their export ventures were strongly affected by the gray market. The evidence
indicates that gray market problems have become ever more severe. Managers of Gray market
international brands must be prepared to address this issue to ensure success. goods
Since the gray market involves the diversion of goods from legitimate supply
chains, most researchers have proposed combating strategies from a supply
perspective. However, these strategies are hard to implement. First, given
globalization, any proactive actions on the supply side will limit a brand manager’s
marketing activities or have some negative impacts. For example, a “one-price-for-all” 599
policy will reduce the brand’s profit margin and limit its market penetration (Howell
et al., 1986). Vertical integration is expensive and limits a brand manager’s channel
strategies, while product differentiation increases production, promotion and other
costs. Second, when the gray market appeared, authorized distributors were hurt and
consumers obtained new reference prices. When authorized distributors can no longer
provide additional value to consumers, brand managers cannot easily regain their
market status through any reactive strategy. Finally, most gray market channel
players are arbitragers who try to obtain short-term profits through price
differentiation among countries (Chang, 1993; Palia and Keown, 1991). Managers of
international brands have difficulty in finding arbitragers and stopping their activities
in every channel and at each stage of the supply chain.
Some researchers have considered the legal aspects of these issues and tried to
discover feasible solutions. However, within the existing legal climate, eliminating the
gray market through legal activities in the USA, Europe and Asia is almost impossible
(Alberts, 1992; Chang, 1993; Gallini and Hollis, 1999; Prince, 2000).
One alternative that has not yet been considered is to address the gray market issue
from a demand perspective, the perspective of the consumer. Understanding consumer
attitude and thinking toward gray market goods may enable effective strategies for
dealing with this problem to be discovered, given that consumers must choose between
gray market and white market (authorized channel) products. To the authors’
knowledge, research that addresses the gray market from the consumer’s perspective
still does not exist. No valid scale for measuring consumer attitude toward gray market
goods has been proposed.
The purpose of this study is to develop a scale on which to measure consumer
attitude toward gray market goods and to examine factors that affect such attitude.
Based on an analysis of empirical data, strategies with which managers of
international brands can address gray market problems are proposed.
This study involves four parts. First, the relationships between consumer attitude
toward gray market goods, its antecedents and its consequences, were examined. A
conceptual model with four hypotheses was proposed. Second, a multi-item scale is
developed to measure consumer attitude toward gray market goods. The procedure
proposed by Churchill (1979) was used to construct valid measures. Third, the
conceptual model was tested using the structural equation modeling method. Finally,
strategies with which managers of international brands can address the gray market
issues are provided.

Development of conceptual model

Consumer attitude and intentions to purchase gray market goods, rather than
purchasing behavior, are considered here. According to Fishbein’s extended model,
known as the theory of reasoned action, behavior is determined by intentions, which
IMR are in turn determined by attitudes and subjective norms (Ajzen and Fishbein, 1980).
21,6 The model represents an attempt to combine both individual level and
interpersonal/group factors within a single paradigm. In the present study, however,
the purchasing of gray market goods seems to be most determined by individual level
factors, as claimed by Netemeyer (1992): “getting a good deal on a product would be
viewed as a valued personal consequence”. Most behavioral models trace causal links
600 from attitude, through intention, to actual behavior, implying that behavioral
intentions must be understood to predict behavior from attitudes (Kim and Hunter,
1993). The attitude-purchase intention link, which is internal and normally less
susceptible to outside forces, is considered here, to reduce the effect of uncontrollable
external factors (Kim and Hunter, 1993).

Consumer attitude toward gray market goods and its correlates

“Attitude” means a learned predisposition to respond to an object in a consistently
favorable or unfavorable way. It significantly plays an important role in consumer
behavior. Attitudes cannot be observed directly, they are mental positions that
marketers must try to infer through research measures (Wilkie, 1994). This article
focuses on consumers’ attitude toward gray market goods in general, rather than any
specific brand or specific product category. This work is thus consistent with that on
the construction of measures that evaluate general consumer attitudes or tendencies
(such as attitude toward advertising in general rather than toward a particular
advertisement).
Although numerous causes of the gray market have been considered in the
literature (Cespedes et al., 1988; Duhan and Sheffet, 1988; Palia and Keown, 1991), the
main differences perceived by the consumer are the lower price and poorer guaranties
(higher risk) of gray market. Normally, the products sold in the gray market are
completely the same as those sold through authorized channels. Therefore, price and
risk constructs are likely to be related to attitude toward gray market goods. Second,
the literature on similar attitudes and their antecedents, such as attitude toward private
label brands (Burton et al., 1998), which have similar properties to those of gray market
goods (lower price, limited guaranty from the retailer only), are considered. Third, 100
open-ended questionnaires were distributed to undergraduate students during
marketing classes to ascertain consumers’ direct associations with gray market
goods. After they had read the definition of gray market goods, as given by Bucklin
(1993), participants were asked to list their associations with them. Of the returned 81
respondents, 66 percent mentioned lower price, 81.9 percent mentioned quality
concerns, 68.7 percent mentioned guaranties and risk, 9.9 percent mentioned legality.
Consequently, three factors that might influence consumers’ attitude toward gray
market goods were determined. They were price consciousness, price-quality inference,
and risk averseness, which are discussed below.

Price consciousness
Price plays an important role in affecting consumer behavior and has been studied
extensively in the literature. Lichtenstein et al. (1993) have examined seven
price-related constructs and separated them according to their positive or negative
effect on consumer purchasing behavior. According to range theory, people use the
range of remembered price experiences to set lower and upper bounds on price
expectations, such that the attractiveness of a market price is a function of its position Gray market
within this range (Janiszewski and Lichtenstein, 1999). Reference price has been goods
discussed as a factor that importantly affects a consumer’s purchasing behavior. After
adaptation-level theory was integrated into pricing theory, an internal reference price
was presented as a degree of adaptation that depends on recent price experiences
(Janiszewski and Lichtenstein, 1999). Rajendran and Tellis (1994) have found that
within this context, the lowest price is an important cue for a reference price, whereas 601
over time, the past prices of the actual brand seem to become the most important cue.
The fact that consumers use the price in the authorized channel as a reference price is
plausible, and so the gray market would take advantage of lower price to attract
consumers’ interest. Most researchers claim that price difference is an important factor
when purchasing from the gray market (Bucklin, 1993; Cavusgil and Sikora, 1988;
Cespedes et al., 1988; Chang, 1993; Duhan and Sheffet, 1988; Lowe and McCrohan, 1989;
Weigand, 1991). Palia and Keown (1991) surveyed US exporters, and found that 64
percent of parallel imports were selling at a lower price. When the gray market sells
simultaneously alongside an authorized channel, consumers with a higher price
consciousness may prefer to select goods sold at the lower price in the gray market.
H1. Consumers’ price consciousness positively affects consumers’ preference for
gray market goods.

Price-quality inference
The belief in price-quality inference, “high price, high quality” and “low price, low
quality”, is important in pricing theory and in determining consumer behavior.
According to the price-expectancy model of consumer choice, consumers evaluate
products by comparing actual price with a referential or expected price determined
from product quality and price-quality correlation of the product category (Ordonez,
1998). Ordonez’s (1998) research supported the price-expectancy model and suggested
that the relative preference for higher price/higher quality products over lower
price/lower quality products increased as the subjective correlation between price and
quality increased. Tellis and Gaeth (1990) examined the impact of information on
consumers’ choice strategies. They found that when information on product quality is
imperfect, the price-quality correlation is an important moderating factor that
influences consumers’ behavior. According to Monroe and Krishnan’s (1985)
price-perceived quality model and Chapman and Wahlers’ (1999) extended model,
price positively affected perceived quality. For durable goods, Brucks et al. (2000)
found that quality has six dimensions, ease of use, versatility, durability, serviceability,
performance and prestige. Price influences consumers’ judgments of quality to various
extents on the quality dimensions. Some experimental research, however, did not
support the price-quality inference. Sjolander (1992) used ice cream to test the effects of
price on perceived product quality. The results did not significantly support a direct
link between the price cue and consumers’ perceptions of quality. In a study performed
to test the effect of store name, brand name and price discounts on consumers’
evaluations and purchase intentions, Grewal (1998) demonstrated that the effect of
price discounts on a brand’s perceived quality was minimal.
Given that most gray market goods are sold at lower prices, the more a consumer
maintains the price-quality inference, the lower the consumer’s perceived quality of
IMR gray market goods. Hence, price-quality inference is expected negatively to affect
21,6 consumer attitude toward gray market goods.
H2. A consumer who more strongly maintains the price-quality inference has a
more negative attitude toward gray market goods.

Risk averseness
602 “Risk” in relation to choosing brands is the probability of occurrence of a problem with
a particular product of a certain brand multiplied by the negative consequences of that
problem (Peter and Ryan, 1976). When a consumer makes a purchase decision, “risk”
implies “greater consequences of making a mistake” and “degree of inconvenience of
making a mistake” (Batra and Sinha, 2000). Havlena and DeSarbo (1991) described the
multidimensional nature of perceived consumer risk, involving performance, financial,
safety, social, psychological, and time/opportunity dimensions. The perceived risk can
powerfully influence consumer behavior. Mitchell (1992) argued that perceived risk
influences the five stages of the consumer decision process, which are problem
recognition, pre-purchase information search, evaluation of alternative, purchase
decision and post-purchase behavior.
Consumers face two main risks when purchasing gray market goods. First, the gray
market increases the opportunity for the entry of black-market goods, also known as
counterfeit goods (Lowe and McCrohan, 1989). Consumers who purchase goods from
the gray market must risk a higher probability of purchasing counterfeit products and
suffering various types of risk, including performance, financial, safety, social,
psychological, and time/opportunity risk. The second risk arises in the post-purchase
stage, including loss of warranty and service from the legitimate distributor. Some
brand managers have asked their authorized distributors not to provide services at all
or increase service charges to gray market goods, substantially raising consumers’ risk
and cost to prevent gray marketers’ free-ride. Hence, consumers’ risk averseness affects
their attitudes toward gray market goods.
H3. Consumer’s risk averseness negatively affects consumer attitude toward gray
market goods.
Consumer ethics may be argued to be worthy of consideration. Consumer ethics have
been defined as, “the moral principle and standards that guide behavior of individuals
or groups as they obtain, use and dispose of goods and service” (Muncy and Vitell,
1992). However, purchasing gray market goods seems not to violate or nearly violate
any ethical standards of consumers (Muncy and Vitell, 1992). Since in the gray market,
consumers legally purchase preferred branded product from a retailer they like, they
do not typically feel that their behavior harms someone else, or that it is in any way
unethical (Vitell and Muncy, 1992). Mathur (1995) considered the relationship between
marketing ethics and the gray market, but from the perspective of the supplier, which
is not considered here.

Purchase intentions
The relationship between attitude and behavioral intentions has been examined. Two
meta-analyses, with combined samples of over 10,000 participants, support the strong
attitude-intention-behavior linkage (Kim and Hunter, 1993; Sheppard et al., 1988).
Additionally, Armstrong et al. (2000) stated that purchase intentions could provide
better forecasts than a simple extrapolation from past sales trends. Berger et al. (1994) Gray market
recommended that managers’ efforts should be focused on altering consumer attitudes goods
before guiding their behavioral decisions.
Product-class involvement represents the average interest a consumer has in a
product category on a daily basis (Wilkie, 1994; Zaichkowsky, 1985), which might be a
variable that importantly moderates consumers’ purchase intentions. For products
with a lower consumer involvement, consumers tend to purchase impulsively, 603
regardless of their original attitude toward the product attributes. In contrast, for
products with a higher consumer involvement, consumers would spend more energy
on consumption-related activities, and hence make more rational decisions. In such
situations, consumers who have a more favorable attitude toward gray market goods
would have stronger purchase intentions, and would be more likely to purchase gray
market goods.
H4. For products with a higher consumer involvement, consumer’s attitude and
purchase intention toward gray market goods are positively related.

Conceptual model
Based on the foregoing, Figure 1 presents a conceptual model.

Methodology
Measurement and selecting products
The procedure proposed by Churchill (1979) was applied to develop a scale to measure
consumer attitude toward gray market goods. Once data were collected, the coefficient

Figure 1.
Conceptual model
IMR alpha, the item-to-total correlation and the exploratory and confirmatory factor
21,6 analyses proposed by Churchill (1979), Fornell and Larcker (1981), Gerbing and
Anderson (1988), and Tian et al. (2001) were used to screen and purify the measurement
items. The following section provides further details. The Appendix presents the final
attitude scale, along with price consciousness, price-quality inference, risk averseness
and purchase intention.
604 The price consciousness and price-quality inference construct measures were taken
from Lichtenstein et al. (1993), while risk averseness construct measures were drawn
from Burton et al. (1998). With regard to the purchase intention construct, a three-item
measurement scale developed by Dodds et al. (1991) and applied by Grewal (1998) was
used. All of the above constructs and items were measured using seven-point
Likert-type scales.
The products used to test the hypotheses must meet some criteria. First, the
products must appear frequently in the gray market. Second, the products must be
used by everyone, not specific people (so a perfume used by females is inappropriate).
Third, the products must be associated with various levels of consumer involvement –
high, middle and low. Three popular gray market goods in Taiwan were chosen:
beverages, watches, and mobile phones. The scale created by Zaichkowsky (1985) and
revised by McQuarrie and Munson (1991) was applied in pretests to measure their
levels of product-class consumer involvement. A total of 120 undergraduate students
were asked to participate in the test during marketing classes. Each student was
randomly assigned to one of three groups and asked to answer questionnaires
designed to measure the product involvement of beverages, watches, and mobile
phones. A total of 107 questionnaires were completed, representing a return rate of 89.2
percent, including 36 respondents in the beverage group, 34 in the watch group and 37
in the mobile ‘phone group. The mean scores of product involvement for beverages,
watches, and mobile phones were 39.3, 47.5 and 52.9 respectively. The involvement
score for beverages was lower than that for watches (t ¼ 2 3.03), and that for watches
was lower than that for mobile phones (t ¼ 2 2.88). The scores are thus significantly
different at the a ¼ 0:05 level. These three products involve relatively low, middle and
high involvement on the part of consumers.

Developing scales of consumer attitude toward gray market goods

The first stage of the survey was conducted to develop scales of consumer attitude
toward gray market goods. A clear definition and description of gray market goods
following Bucklin (1993) was used to specify the domain of gray market goods. Similar
scales of attitude measure in the literature were reviewed and modified to develop the
initial items pool (e.g. consumer attitude toward private label brand, consumer attitude
toward foreign goods). Consequently, an initial item pool of 12 measurement items was
obtained. A convenience sample of 200 adults who joined marketing course at night
school were invited to participate in the survey. A total of 156 questionnaires were
completed and returned, representing a response rate of 78 percent. Of the respondents,
37.4 percent were male, and had an average age of 26.3 years. An exploratory factor
analysis was used to filter the 12 initial measurement items and one factor model was
suggested by a scree plot. After items with a factor loading below 0.6 were deleted
(Sharma, 1996), six items were kept.
 Churchill (1979) suggested that the developing procedure of measure should be Gray market
repeated until satisfactory results were achieved. Although the first stage of the survey goods
led to the single component model of attitude, the possibility of the multidimensionality
of attitude was kept open. A focus group discussion, as proposed by Churchill (1979),
was then used to generate additional items to cover the entire breadth of attitudes. Ten
undergraduate students participated in the discussion and provided various
descriptions of gray market goods. After overlapping and similar items of the six 605
items maintained in first stage of the survey were deleted, seven more items were
selected. A total of 13 items were used in the second stage of the survey.
In the second stage of the survey, 210 questionnaires, including all 13 items, were
distributed to working adults who were pursuing bachelors’ degrees at night schools in
Northern Taiwan; 176 questionnaires were completed and returned, representing a
response rate of 84 percent. Of the respondents, 40 percent were male and 60 percent
were female, 26.4 percent were married and 73.6 percent were single; they had a mean
age of 27.8 years, and a mean personal income of NT$430,000 per year. Using principal
component analysis, two factors were extracted from the 13 items, with eigenvalues of
7.1 and 1.2 respectively. However, a scree plot strongly supported a single component
model. Items with a loading of under 0.6 were deleted (Sharma, 1996), leaving six items;
one of them was a negative statement. A second principal component analysis was
performed on the remaining six items; only one component was extracted, explaining
58 percent of total variance. The item-to-total correlations range from 0.45 to 0.77, and
the Cronbach a of the six items is 0.85, supporting the internal consistency of the
measure (Nunnally and Bernstein, 1994).
A confirmatory factor analysis was then performed using LISREL VIII on data on
another sample to confirm further the one-component model of attitude (Gerbing and
Anderson, 1988). A total of 250 questionnaires that included six attitude scales were
distributed to working adults who were pursuing bachelors’ degrees at night school.
The respondents in the sample differed from those in the previous surveys. Overall,
233 questionnaires were completed and returned, representing a 93 percent return rate.
Of the respondents, 39 percent were males, 61 percent were females; the average age
was 27.1 years, and the mean personal income was $NT405,000. Statistics concerning
the data fit (x2 ¼ 7:96, d:f: ¼ 9, P ¼ 0:54, GFI ¼ 0:99, AGFI ¼ 0:97) support the
one-component model. Estimated lambdas and t-values indicate that each item
contributes significantly to the measure (t-values range from 7.06 to 12.89). Hence, this
one component model that includes six measurement items is used in further analysis.
Since the gray market implies intra-brand competition (Bucklin, 1993), purchasing
gray market goods is a very specific activity (choice within a specific brand). Sheth et al.
(1991) classified market choice behavior into three levels or types:
(1) the choice to buy or not to buy;
(2) the choice of product type; and
(3) the choice of brand.
The purchasing of gray market goods is likely to fall in a level below the third level
(Bergen et al., 1998; Bucklin, 1993). Additionally, much experimental research has led
to a unidimensional measure of attitude (Burton et al., 1998; Donthu, 1992), so the
proposed unidimensional measure of attitude used here should be acceptable.
IMR Model test
21,6 The model tests used data from the second-stage survey, which included price
consciousness, price-quality inference, risk averseness, and purchase intentions of gray
market goods for the three selected products. At the end of the questionnaire,
demographic data including gender, age, income, and marriage status were elicited,
and a question was asked concerning whether the consumer had ever knowingly
606 purchased gray market goods.

Results
Reliability
Table I lists the correlation matrix of all variables. In the correlation matrix, correlation
coefficients between variables that belong to the same constructs are clearly higher
than others, suggesting the internal consistency of multi-item measures.
A formula proposed by Fornell and Larcker (1981) was applied to determine the
reliability and the average variances extracted (AVE) to examine the reliability and
validity of the measures. Table II summarizes all the properties of the constructs. The
Cronbach alpha values indicate that most measures have good internal consistency
with a values above 0.7 (Nunnally and Bernstein, 1994); the only exception is the
measure of risk averseness (a ¼ 0:66), which meets the minimal acceptable level of
0.65, as suggested by DeVellis (1991). The reliabilities of the measures of the
constructs, ranging from 0.70 to 0.95, were good.

Validity
All the measured items are grouped together to run an exploratory factor analysis to
verify the dimensionalities of measured constructs (Gerbing and Anderson, 1988).
Seven factors with eigenvalues greater than one were extracted, representing three
causal constructs (price consciousness, price-quality inference and risk averseness), the
consumer attitude construct, and purchase intentions toward beverages, watches, and
mobile phones. High factor loadings appeared only between each construct and its
indicating items after rotation, supporting the construct validity. For convergent
validity, the last column of Table II shows that most measures meet Fornell and
Larcker’s (1981) criterion (AVE . 0:5). Since it is a more conservative criterion, we
further examined the pattern of Lambda and t-values of the measures. All of the
t-values that correspond to the measuring items of constructs are significant at p ,
0:01 level, and patterns of lambdas also support convergent validity (Gerbing and
Anderson, 1988). For discriminant validity, all of the AVE values listed in Table II
exceeded the squared correlations between constructs (Tables II and III), supporting
discriminant validity (Fornell and Larcker, 1981).
For criterion validity, consumers who had knowingly purchased gray market goods
should have a more positive attitude toward gray market goods than others.
Respondents were grouped according to whether they had knowingly purchased gray
market goods. Then, one-way ANOVA was used to test the difference of attitude score.
A total of 59.5 percent of respondents reported that they had experience of knowingly
purchasing gray market goods, with a mean attitude score of 23.85; others did not and
had a mean attitude score of 19.07. The attitude scores of the consumers in the group
who had purchased gray market goods are significantly higher than those of the other
 Price PQ RA Attitude PI (B) PI(W) PI(M)
p1 p2 p3 p4 pq1 pq2 pq3 r1 r2 r3 r4 a1 a2 a3 a4 a5 a6 b11 b12 b13 b21 b22 b23 b31 b32 b33

Price p1 1.00 – – – – – – – – – – – – – – – – – – – – – – – – –
p2 0.58 1.00 – – – – – – – – – – – – – – – – – – – – – – – –
p3 0.46 0.46 1.00 – – – – – – – – – – – – – – – – – – – – – – –
p4 0.35 0.52 0.56 1.00 – – – – – – – – – – – – – – – – – – – – – –
PQ pq1 2 0.06 20.05 0.15 0.03 1.00 – – – – – – – – – – – – – – – – – – – – –
pq2 2 0.14 20.09 0.06 0.06 0.57 1.00 – – – – – – – – – – – – – – – – – – – –
pq3 2 0.06 20.16 0.00 2 0.06 0.38 0.52 1.00 – – – – – – – – – – – – – – – – – – –
RA r1 0.09 0.05 0.05 2 0.01 20.10 20.13 2 0.05 1.00 – – – – – – – – – – – – – – – – – –
r2 0.11 0.20 0.02 2 0.02 20.10 20.24 2 0.12 0.51 1.00 – – – – – – – – – – – – – – – – –
r3 2 0.01 20.06 0.02 2 0.03 0.09 0.12 0.06 0.43 0.15 1.00 – – – – – – – – – – – – – – – –
r4 0.04 0.10 20.03 0.04 20.02 0.00 0.12 0.28 0.21 0.35 1.00 – – – – – – – – – – – – – – –
Attitude a1 0.01 20.14 20.05 2 0.02 20.06 0.00 0.02 20.11 20.19 0.06 20.06 1.00 – – – – – – – – – – – – – –
a2 0.00 20.08 20.01 0.12 20.13 0.00 0.11 20.04 20.08 0.11 0.15 0.54 1.00 – – – – – – – – – – – – –
a3 2 0.09 20.17 20.05 2 0.03 20.08 20.02 0.02 20.13 20.14 0.08 20.01 0.72 0.72 1.00 – – – – – – – – – – – –
a4 2 0.11 20.06 20.01 2 0.06 20.02 0.12 0.12 20.20 20.14 2 0.03 20.05 0.49 0.46 0.56 1.00 – – – – – – – – – – –
a5 2 0.04 20.15 0.03 0.00 20.10 20.04 0.03 0.02 20.08 0.05 20.04 0.45 0.53 0.54 0.53 1.00 – – – – – – – – – –
a6 0.18 0.09 0.18 0.06 20.22 20.18 2 0.04 20.11 20.12 2 0.08 20.10 0.35 0.39 0.36 0.27 0.43 1.00 – – – – – – – – –
PI(B) b11 2 0.03 20.08 20.06 2 0.10 0.00 20.06 2 0.01 20.06 20.19 2 0.01 20.09 0.19 0.03 0.10 0.12 0.13 0.13 1.00 – – – – – – – –
b12 0.03 20.06 0.01 2 0.11 20.05 20.09 2 0.03 20.03 20.19 2 0.02 0.00 0.15 0.02 0.06 0.09 0.07 0.18 0.85 1.00 – – – – – – –
b13 0.09 20.05 0.04 2 0.03 20.08 20.09 2 0.03 20.01 20.21 2 0.02 20.02 0.15 20.02 0.05 0.03 0.14 0.20 0.75 0.80 1.00 – – – – – –
PI(W) b21 0.03 0.03 20.02 0.03 20.12 20.07 2 0.12 20.04 20.17 0.07 0.13 0.32 0.44 0.36 0.22 0.36 0.33 0.19 0.14 0.14 1.00 – – – – –
b22 0.05 20.04 20.02 2 0.08 20.11 20.15 2 0.09 0.04 20.11 0.07 0.16 0.33 0.44 0.38 0.20 0.42 0.37 0.14 0.14 0.14 0.85 1.00 – – – –
b23 0.09 20.04 20.02 2 0.03 20.24 20.14 2 0.07 20.05 20.12 0.02 0.08 0.29 0.34 0.30 0.17 0.32 0.30 0.12 0.14 0.20 0.71 0.69 1.00 – – –
PI(M) b31 0.01 0.03 20.03 2 0.06 20.11 0.00 2 0.01 20.06 20.18 0.13 20.01 0.39 0.46 0.40 0.32 0.44 0.39 0.14 0.11 0.13 0.53 0.48 0.46 1.00 – –
b32 0.02 20.02 20.03 2 0.07 20.14 20.03 2 0.05 20.01 20.18 0.13 0.02 0.43 0.45 0.40 0.29 0.47 0.39 0.15 0.18 0.20 0.50 0.54 0.47 0.92 1.00 –
b33 0.01 20.03 20.06 2 0.09 20.09 20.04 2 0.01 0.02 20.08 0.16 0.03 0.37 0.43 0.43 0.25 0.44 0.36 0.07 0.06 0.08 0.46 0.46 0.55 0.84 0.81 1.00
Notes: PC ¼ Price consciousness; PQ ¼ Price-quality inference; RA ¼ Risk averseness; Attitude ¼ Consumer attitude toward gray market goods; PI(B) ¼ Purchase intention of beverage;
PI(W) ¼ Purchase intention of watch; PI(M) ¼ Purchase intention of mobile phone

Correlation matrix
goods
Gray market

607

Table I.
IMR Average variance
21,6 Construct Item no. Cronbach a Reliabilitya extracted (AVE)a

Price consciousness 4 0.79 0.82 0.53

Price-quality inference 3 0.74 0.75 0.51
Risk averseness 4 0.66 0.70 0.39
608 Consumer’s attitude
toward gray market goods 6 0.85 0.87 0.53
Purchase intention
(beverage) 3 0.92 0.92 0.80
Purchase intention
(watch) 3 0.90 0.90 0.76
Table II. Purchase intention
Summary of constructs’ (mobile phone) 3 0.95 0.95 0.86
measures Note: a Fornell and Larcker (1981)

Gamma (g) Beta (b)

Product PC PQ RA Attitude Model fit

Beverage Attitude 0.08 20.28 20.18 x2 ¼ 171.28 df ¼ 156 (p ¼ 0.19)

(0.84) (2 2.53)* (21.83)** GFI ¼ 0.90 AGFI ¼ 0.87
PI 0.17
(1.79)**
Watch Attitude 0.09 20.29 2 0.21 x2 ¼ 175.54 df ¼ 156 (p ¼ 0.14)
(0.94) (2 2.62)* (22.05)* GFI ¼ 0.90 AGFI ¼ 0.86
PI 0.63
(5.88)*
Mobile phone Attitude 0.07 20.24 20.20 x2 ¼ 171.97 df ¼ 156 (p ¼ 0.18)
(0.72) (2 2.20)* (21.91)** GFI ¼ 0.90 AGFI ¼ 0.87
0.65
PI (6.16)*
Notes: * Significant at a = 0.05 level; ** significant at a = 0.1 level
Table III. PC ¼ price consciousness; PQ ¼ price-quality inference; RA ¼ risk averseness; Attitude ¼ consumer
Parameter estimation of attitude toward gray market goods; PI ¼ purchase intention
full model Numbers in parentheses indicate t-values

group, and are significant at the a ¼ 0:01 level (F ¼ 19:03, P ¼ 0:00), supporting the
known-group validity (Tian et al., 2001).

Estimation of structure coefficients

Model parameters were estimated separately using the LISREL VIII program to test
the proposed conceptual model across three product categories (beverages, watches
and mobile phones). Table III presents the results. The fit statistics of each model meet
acceptable levels (GFI ¼ 0:90, AGFI ¼ 0:86 or above). The effect of price
consciousness on consumer attitude toward gray market goods is not significant at
the a ¼ 0:05 level, indicating that H1 is not supported. Since the effect of price Gray market
consciousness on consumer attitude is insignificant across three product categories,
the price consciousness construct was removed from the full model to yield a reduced
goods
model, the results of which are presented in Table IV. Fit statistics of each reduced
model are favorable (GFI ¼ 0:92 or above, AGFI ¼ 0:89 or above).
The price-quality inference negatively and significantly affects consumer attitude at
the a ¼ 0:05 level, indicating that H2 is strongly supported. A consumer who believes 609
more strongly in the price-quality inference has a more negative attitude toward gray
market goods. Risk averseness negatively and significantly affects consumer attitudes,
implying that H3 is also supported. Finally, consumer attitude is expected to affect
positively purchase intentions of gray market goods that have higher consumer
involvement. From the estimated b values in Table IV, the effect of consumer attitude
on purchase intentions of beverages is not significant. However, the positive influence
of consumer attitude on purchase intentions of watches and mobile phones is
significant at the a ¼ 0:05 level, supporting H4.

Discussion
The results of the analysis provide valuable insights for future research and managers
of international brands who wish to create strategies for addressing gray market
issues. First, the developed attitude scale fills the void in the literature and facilitates
investigation into the gray market from the demand perspective. It opens a new
direction for improving our understanding of the gray market. With these measures,
practitioners can segment markets and develop an effective strategy to deal with the
problems of the gray market.
Second, although most scholars and brand managers believe that price is the main
reason that causes consumers to purchase gray market goods, this study reveals that
the effect of price consciousness on consumer attitude is insignificant, for two possible
reasons. One is similar to that proposed by Dodds et al. (1991): the effect of price on

Gamma (g) Beta (b)

Product PQ RA Attitude Model fit

Beverage Attitude 2 0.23 2 0.16 x2 ¼ 94.20 df ¼ 93 (p ¼ 0.45)

(2 2.26)* (2 1.91)** GFI ¼ 0.93 AGFI ¼ 0.90
PI 0.12
(1.39)
Watch Attitude 2 0.21 2 0.19 x2 ¼ 105.54 df ¼ 93 (p ¼ 0.18)
(2 2.03)* (2 2.23)* GFI ¼ 0.92 AGFI ¼ 0.89
PI 0.53
(5.36)*
Mobile phone Attitude 2 0.20 2 0.20 x2 ¼ 104.34 df ¼ 93 (p ¼ 0.20)
(2 1.99)* (2 2.30)* GFI ¼ 0.93 AGFI ¼ 0.89
PI 0.53
(5.70)*
Notes: * Significant at a = 0.05 level; ** significant at a = 0.1 level Table IV.
PQ ¼ price-quality inference; RA ¼ risk averseness; Attitude ¼ consumer attitude toward gray Parameter estimation of
market goods; PI ¼ purchase intention. Numbers in parentheses indicate t-values reduced model
IMR perceived value and willingness to buy may be inverse quadratic (inverted U). If a
21,6 quadratic relationship exists, then price positively affects attitude at a particular level,
and negatively affects attitude at another level, eliminating the linear correlation
between price and attitude. Another possibility relates to moderating factors, such as
the product cost as a percentage of income, information, consumers’ knowledge, and
others, which may exist between price consciousness and consumer attitude. Further
610 research on the relationship between price consciousness and attitude toward the gray
market goods is required.
Third, evidence indicates that the price-quality inference significantly and
negatively affects consumer attitude toward gray market goods. With most gray
market importers’ free riding on advertising investment and services, low costs and
prices have become their main advantage with which the gray market competes with
authorized distributors. Gray markets attract consumers with high price sensitivities.
However, given the price-quality inference, quality becomes the main concern of the
consumers. Managers of international brands could reinforce price-quality
inference-related messages in their communication campaigns, and improve
consumers’ perceptions of quality in authorized channels. Champion (1998)
suggested that the gray market provides a new type of market segmentation based
on consumers’ price sensitivity. High quality and extensive service will become a major
competitive advantage with which authorized distributors can secure consumers with
a low price-sensitivity. Thus, managers of international brands could maintain their
competitiveness by emphasizing price-quality inference and improving the consumers’
perceptions of quality in authorized channels.
Fourth, the results of this study indicate that risk averseness negatively influences
consumer attitude toward gray market goods. When purchasing gray market goods,
consumers must bear two important risks – a higher likelihood of obtaining a
counterfeit product and a deficient guarantee and poor servicing of the product after
purchase. For managers of international brands, reminding consumers of the existence
of gray market goods and educating them in identifying counterfeit products might not
be a good idea, since doing so runs the risk of making potential customers feel
threatened, reducing brand loyalty. An easier and safer way is to advise consumers
where to buy brand products with a good guarantee and supported by good servicing
by the brand owners. By promoting authorized channel outlets, their guarantees and
their services, brand owners can reduce consumers’ purchasing risks and support
authorized distributors, reducing the negative impact of the gray market.
Finally, this study used respondents in Taiwan to test the model. According to a
report in International Financial Statistics (International Monetary Fund, 2001;
Directorate-General of Budget, Accounting and Statistic, 2001), Taiwan’s foreign trade
dependency was as high as 82 percent in 2001, much higher than that of the USA (19
percent), Japan (18 percent), the UK (43 percent) and Germany (57 percent). Frequent
foreign trade activity facilitates the growth of gray markets in Taiwan. Chang (1993)
reported that Taiwan’s legal environment is more favorable for gray market distributors
than that of the USA. Gray market goods are widespread and most consumers are
familiar with them. Thus, the use of respondents in Taiwan to examine issues
concerning the gray market is appropriate. However, whether the results of this study
can be extended to other cultures and economic environments, in which consumers may
or may not be exposed to so many gray market goods, awaits further study.
Suggestions and conclusions Gray market
This study suggests directions for future research. First, future research may use a goods
detailed experimental design to elucidate further the effect of price consciousness on
consumer attitude toward gray market goods, including moderating factors. Second,
gray market goods of famous international brands appear frequently in several
countries, and the influences of culture and economic environments on the model are
important. Third, product familiarity may importantly moderate the effect of 611
price-quality inference on consumer attitude. Finally, the appearance of the gray
market and the reactions of brand owners may affect brand image, brand loyalty and
store image. Future research should address these issues.
This research contributes to the existing literature by establishing a valid measure
of consumer attitude toward gray market goods, providing a conceptual model, and
suggesting feasible strategies for managers of international brands. By focusing on the
demand side of the gray market, managers of international brands can better control
the gray market and reduce its impact.

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Appendix. Measurement scales

(Respondents are requested to answer the following questions with answers from strongly agree
614 to strongly disagree on a Likert seven-point scale, “2 ” in parentheses means a negative
statement)

Consumer attitude toward gray market goods

.
Generally speaking, buying gray market goods is a better choice.
.
Considering price, I prefer gray market goods.
.
I like shopping for gray market goods.
.
Buying gray market goods generally benefits the consumer.
.
There’s nothing wrong with purchasing gray market goods.
.
I never consider gray market goods when choosing merchandise (2 ).

Price consciousness (Lichtenstein et al., 1993)

.
I am not willing to go to the extra effort to find lower prices (2 ).
.
The money saved by searching for lower prices is usually not worth the time and effort
(2 ).
.
I would never shop at more than one store to find lower prices (2 ).
.
The time it takes to find lower prices is usually not worth the effort (2 ).

Price-quality inference (Lichtenstein et al., 1993)

.
Generally speaking, the higher the price of a product, the higher the quality.
.
The price of a product is a good indicator of its quality.
.
You always have to pay a bit more for the best.

Risk averseness (Burton et al., 1998)

. I don’t like to take risks.
.
Compared to most people I know, I like to “live life on the edge” (2).
.
I have no desire to take unnecessary chances on things.
.
Compared to most people I know, I like to gamble on things (2).

Purchase intention (Grewal, 1998)

.
I would purchase _______.
.
I would consider buying ________.
.
The probability that I would consider buying _________.