Gray marketing, the selling of trademarked products through channels

Question

Gray marketing, the selling of trademarked products through channels of distribution not authorized by the trademark holder, can involve distribution of goods either within a market region or across market boundaries. Gray marketing within a market region (“channel flow diversion”) occurs when manufacturer-authorized distributors sell trademarked goods to unauthorized distributors who then sell the goods to consumers within the same region. For example, quantity discounts from manufacturers may motivate authorized dealers to enter the gray market because they can purchase larger quantities of a product than they themselves intend to stock if they can sell the extra units through gray marketing channels.

When gray marketing occurs across market boundaries, it is typically in an international setting and may be called “parallel importing.” Manufacturers often produce and sell products in more than one country and establish a network of authorized dealers in each country. Parallel importing occurs when trademarked goods intended for one country are diverted from proper channels (channel flow diversion) and then exported to unauthorized distributors in another country.

Trademark owners justifiably argue against gray marketing practices since such practices clearly jeopardize the goodwill established by trademark owners: consumers who purchase trademarked goods in the gray market do not get the same “extended product,” which typically includes pre- and postsale service. Equally important, authorized distributors may cease to promote the product if it becomes available for much lower prices through unauthorized channels.

Current debate over regulation of gray marketing focuses on three disparate theories in trademark law that have been variously and confusingly applied to parallel importation cases: universality, exhaustion, and territoriality. The theory of universality holds that a trademark is only an indication of the source or origin of the product. This theory does not recognize the goodwill functions of a trademark. When the courts apply this theory, gray marketing practices are allowed to continue because the origin of the product remains the same regardless of the specific route of the product through the channel of distribution. The exhaustion theory holds that a trademark owner relinquishes all rights once a product has been sold. When this theory is applied, gray marketing practices are allowed to continue because the trademark owners’ rights cease as soon as their products are sold to a distributor. The theory of territoriality holds that a trademark is effective in the country in which it is registered. Under the theory of territoriality, trademark owners can stop gray marketing practices in the registering countries on products bearing their trademarks. Since only the territoriality theory affords trademark owners any real legal protection against gray marketing practices, I believe it is inevitable as well as desirable that it will come to be consistently applied in gray marketing cases.   1 
 1. Which one of the following best expresses the main point of the passage?

(A) Gray marketing is unfair to trademark owners and should be legally controlled.
(B) Gray marketing is practiced in many different forms and places, and legislators should recognize the futility of trying to regulate it.
(C) The mechanisms used to control gray marketing across markets are different from those most effective in controlling gray marketing within markets.
(D) The three trademark law theories that have been applied in gray marketing cases lead to different case outcomes.
(E) Current theories used to interpret trademark laws have resulted in increased gray marketing activity.

2 
 2. The function of the passage as a whole is to

(A) criticize the motives and methods of those who practice gray marketing
(B) evaluate the effects of both channel flow diversion and parallel importation
(C) discuss the methods that have been used to regulate gray marketing and evaluate such methods’ degrees of success
(D) describe a controversial marketing practice and evaluate several legal views regarding it
(E) discuss situations in which certain marketing practices are common and analyze the economic factors responsible for their development

3 
 3. Which one of the following does the author offer as an argument against gray marketing?

(A) Manufacturers find it difficult to monitor the effectiveness of promotional efforts made on behalf of products that are gray marketed.
(B) Gray marketing can discourage product promotion by authorized distributors.
(C) Gray marketing forces manufacturers to accept the low profit margins that result from quantity discounting.
(D) Gray marketing discourages competition among unauthorized dealers.
(E) Quality standards in the manufacture of products likely to be gray marketed may decline.

4 
 4. The information in the passage suggests that proponents of the theory of territoriality would probably differ from proponents of the theory of exhaustion on which one of the following issues?

(A) the right of trademark owners to enforce, in countries in which the trademarks are registered, distribution agreements intended to restrict distribution to authorized channels
(B) the right of trademark owners to sell trademarked goods only to those distributors who agree to abide by distribution agreements
(C) the legality of channel flow diversion that occurs in a country other than the one in which a trademark is registered
(D) the significance consumers attach to a trademark
(E) the usefulness of trademarks as marketing tools

5 
 5. The author discusses the impact of gray marketing on goodwill in order to

(A) fault trademark owners for their unwillingness to offer a solution to a major consumer complaint against gray marketing
(B) indicate a way in which manufacturers sustain damage against which they ought to be protected
(C) highlight one way in which gray marketing across markets is more problematic than gray marketing within a market
(D) demonstrate that gray marketing does not always benefit the interests of unauthorized distributors
(E) argue that consumers are unwilling to accept a reduction in price in exchange for elimination of service

6 
 6. The author’s attitude toward the possibility that the courts will come to exercise consistent control over gray marketing practices can best be characterized as one of

(A) resigned tolerance
(B) utter dismay
(C) reasoned optimism
(D) unbridled fervor
(E) cynical indifference

7 
 7. It can be inferred from the passage that some channel flow diversion might be eliminated if

(A) profit margins on authorized distribution of goods were less than those on goods marketed through parallel importing
(B) manufacturers relieved authorized channels of all responsibility for product promotion
(C) manufacturers charged all authorized distributors the same unit price for products regardless of quantity purchased
(D) the postsale service policies of authorized channels were controlled by manufacturers
(E) manufacturers refused to provide the “extended product” to consumers who purchase goods in the gray market

tapasgupta · Answer

1. Which one of the following best expresses the main point of the passage?

(A) Gray marketing is unfair to trademark owners and should be legally controlled.  - the 3 rd para summarizes the first part of the sentence and last line shows that it should be legally controlled.
 (B) Gray marketing is practiced in many different forms and places, and legislators should recognize the futility of trying to regulate it.  - Inconsistent. Nothing is discussed about the role of legislators
 (C) The mechanisms used to control gray marketing across markets are different from those most effective in controlling gray marketing within markets.  - out of scope
 (D) The three trademark law theories that have been applied in gray marketing cases lead to different case outcomes.  - Inconsistent. That is discussed in the last para but not the main point of the passage
 (E) Current theories used to interpret trademark laws have resulted in increased gray marketing activity.  - out of scope

2. The function of the passage as a whole is to

(A) criticize the motives and methods of those who practice gray marketing  - out of scope
 (B) evaluate the effects of both channel flow diversion and parallel importation  - Inconsistent
 (C) discuss the methods that have been used to regulate gray marketing and evaluate such methods’ degrees of success  - out of scope
 (D) describe a controversial marketing practice and evaluate several legal views regarding it - marketing practice is GM and legal views are 3 theories 
 (E) discuss situations in which certain marketing practices are common and analyze the economic factors responsible for their development  - out of scope

3. Which one of the following does the author offer as an argument  against  gray marketing?

(A) Manufacturers find it difficult to monitor the effectiveness of promotional efforts made on behalf of products that are gray marketed.
  - out of scope
 (B) Gray marketing can discourage product promotion by authorized distributors.  - If the promotion is less, then the authorized distribute will purchase less goods which will hamper the GM
 (C) Gray marketing forces manufacturers to accept the low profit margins that result from quantity discounting.  - out of scope
 (D) Gray marketing discourages competition among unauthorized dealers.  - opposite. If it decreases the competition, then the argument will go with the GM 
 (E) Quality standards in the manufacture of products likely to be gray marketed may decline.  - out of scope

4. The information in the passage suggests that proponents of the theory of territoriality would probably differ from proponents of the theory of exhaustion on which one of the following issues?

(A) the right of trademark owners to enforce, in countries in which the trademarks are registered, distribution agreements intended to restrict distribution to authorized channels   - the 3rd para explains the same
 (B) the right of trademark owners to sell trademarked goods only to those distributors who agree to abide by distribution agreements  - out of scope
 (C) the legality of channel flow diversion that occurs in a country other than the one in which a trademark is registered  - Inconsistent
 (D) the significance consumers attach to a trademark  - out of scope
 (E) the usefulness of trademarks as marketing tools  - out of scope

5. The author discusses the impact of gray marketing on goodwill in order to

(A) fault trademark owners for their unwillingness to offer a solution to a major consumer complaint against gray marketing  - out of scope
 (B) indicate a way in which manufacturers sustain damage against which they ought to be protected  - 1st line of 3rd para says the same
 (C) highlight one way in which gray marketing across markets is more problematic than gray marketing within a market  - out of scope
 (D) demonstrate that gray marketing does not always benefit the interests of unauthorized distributors  - out of scope
 (E) argue that consumers are unwilling to accept a reduction in price in exchange for elimination of service  - the para is more concerned about the trademark owners

6. The author’s attitude toward the possibility that the courts will come to exercise consistent control over gray marketing practices can best be characterized as one of

(A) resigned tolerance  - He is positive instead of tolerant
 (B) utter dismay - opposite
 (C) reasoned optimism  - the last line said by the author showed optimism
 (D) unbridled fervor  - out of scope
 (E) cynical indifference  - out of scope

7. It can be inferred from the passage that some channel flow diversion might be eliminated if

(A) profit margins on authorized distribution of goods were less than those on goods marketed through parallel importing  - opposite
 (B) manufacturers relieved authorized channels of all responsibility for product promotion  - out of scope
 (C) manufacturers charged all authorized distributors the same unit price for products regardless of quantity purchased  - the last line of the 1st para says the main base of the GM. If that is eliminated, then diversion can be eliminated
 (D) the postsale service policies of authorized channels were controlled by manufacturers  - that will jeopardize the goodwill - out of scope
 (E) manufacturers refused to provide the “extended product” to consumers who purchase goods in the gray market  - that will jeopardize the goodwill - out of scope

Sajjad1994 · Answer

Explanation

4. The information in the passage suggests that proponents of the theory of territoriality would probably differ from proponents of the theory of exhaustion on which one of the following issues?

Explanation

Legal matters, the theories of territoriality and exhaustion should have pointed you to the last para. Lines 38-47 reveal that these two theories differ on the rights of manufacturers: According to the exhaustion theory, manufacturers have no legal right to regulate the way in which distributors sell products to the public, while the territoriality theory holds that manufacturers do have such a right in countries where they have registered their trademarks. That’s what  (A)  says in a slightly different way.

(B)  is a bit more tricky. Once again, territoriality and exhaustion differ only on the issue of whether manufacturers have the right to exercise control over the way in which distributors sell products to the public; these theories are not concerned with the issue of manufacturer sales to distributors.

(C)  is out because territoriality turns a blind eye to gray marketing practices in countries where manufacturers have not registered their trademarks. So, in these cases, it’s not different from exhaustion.

(D), (E)  The theories in question have nothing whatsoever to do with either consumer preferences, choice  (D) , or the marketing value of trademarks, choice  (E) ; territoriality and exhaustion deal exclusively with the rights of manufacturers. So the issues in these two choices are outside the scope.

Answer: A

Hope it helps

auradediligodo · Answer

P1: GM and a case in which authorized dealers are prone to enter it
P2: Parallel importing
P3: Drawbacks of GM for trademark owners
P4:Three theories and their impact on GM
MP: Discuss GM, its implications and theories that regulate it

1. Which one of the following best expresses the main point of the passage?

(A) Gray marketing is unfair to trademark owners and should be legally controlled. - it is broad enough to encompass all the passage 
(B) Gray marketing is practiced in many different forms and places, and legislators should recognize the futility of trying to regulate it. - inconsistent because of the second part after the comma: legislator are not mentioned in this way 
(C) The mechanisms used to control gray marketing across markets are different from those most effective in controlling gray marketing within markets. - no such comparison was made 
(D) The three trademark law theories that have been applied in gray marketing cases lead to different case outcomes. -  partial scope, last paragraph 
(E) Current theories used to interpret trademark laws have resulted in increased gray marketing activity. - current theories are described only in the last paragraph

2. The function of the passage as a whole is to

(A) criticize the motives and methods of those who practice gray marketing - no critique 
(B) evaluate the effects of both channel flow diversion and parallel importation -  this is not broad enough 
(C) discuss the methods that have been used to regulate gray marketing and evaluate such methods’ degrees of success - this could be related only to last paragrah 
(D) describe a controversial marketing practice and evaluate several legal views regarding it -  correct but I though it was inconsistent since nowhere it is mentioned that the practice is controversial.... 
(E) discuss situations in which certain marketing practices are common and analyze the economic factors responsible for their development - i thought this one was the closest actually, any help on this?

3. Which one of the following does the author offer as an argument against gray marketing?

(A) Manufacturers find it difficult to monitor the effectiveness of promotional efforts made on behalf of products that are gray marketed. -  monitoring the effect on PE is not discussed 
(B) Gray marketing can discourage product promotion by authorized distributors. - mentioned in 3rd paragraph 
(C) Gray marketing forces manufacturers to accept the low profit margins that result from quantity discounting. - not metioned 
(D) Gray marketing discourages competition among unauthorized dealers. - this kind of competition is not discussed 
(E) Quality standards in the manufacture of products likely to be gray marketed may decline. - quality standards are not mentioned

4. The information in the passage suggests that proponents of the theory of territoriality would probably differ from proponents of the theory of exhaustion on which one of the following issues?

(A) the right of trademark owners to enforce, in countries in which the trademarks are registered, distribution agreements intended to restrict distribution to authorized channels -  this is the description of T which is very different from the description of E 
(B) the right of trademark owners to sell trademarked goods only to those distributors who agree to abide by distribution agreements - T theory talks only about the effectiveness of the trademark sold but not any restriction on the sales 
(C) the legality of channel flow diversion that occurs in a country other than the one in which a trademark is registered -  legality is not discussed. effectiveness of trademark sold is 
(D) the significance consumers attach to a trademark - not mentioned 
(E) the usefulness of trademarks as marketing tools - out of the scope here

5. The author discusses the impact of gray marketing on goodwill in order to

my rethinking here is that goodwill is discussed in order to highlight how GM goes against the interests of those who sell legally trademark products

(A) fault trademark owners for their unwillingness to offer a solution to a major consumer complaint against gray marketing - trademark owners are not blamed here 
(B) indicate a way in which manufacturers sustain damage against which they ought to be protected - correct: GM is wrong and leads to damage 
(C) highlight one way in which gray marketing across markets is more problematic than gray marketing within a market - such comparison is not made 
(D) demonstrate that gray marketing does not always benefit the interests of unauthorized distributors - I think here is out of scope 
(E) argue that consumers are unwilling to accept a reduction in price in exchange for elimination of service -  not mentioned

6. The author’s attitude toward the possibility that the courts will come to exercise consistent control over gray marketing practices can best be characterized as one of

refer to the last lines of the passage here

(A) resigned tolerance - cannot be inferred 
(B) utter dismay - cnnot be inferred 
(C) reasoned optimism - in the last lines the author  reasons  why the last theory  will work   
(D) unbridled fervor - cannot be inferred 
(E) cynical indifference - as mentioned in C there is some reasoning and some positivity that the last theory will be applied

7. It can be inferred from the passage that some channel flow diversion might be eliminated if

refer to the example in the first paragraph:  Huge # of discounts motivates AS to enter GM

(A) profit margins on authorized distribution of goods were less than those on goods marketed through parallel importing - this comparison is not mentioned 
(B) manufacturers relieved authorized channels of all responsibility for product promotion - no impact 
(C) manufacturers charged all authorized distributors the same unit price for products regardless of quantity purchased - no discounts=no incentive=fewer authorized sellers to enter GM 
(D) the postsale service policies of authorized channels were controlled by manufacturers - no impct 
(E) manufacturers refused to provide the “extended product” to consumers who purchase goods in the gray market - it could be a possibility but nowhere this can be inferred from the passage

Sajjad1994 · Answer

Explanation

5. The author discusses the impact of gray marketing on goodwill in order to

The stem’s reference to the effect of gray marketing on  “goodwill”  should send you to the  third paragraph . The concept of goodwill is introduced as part of the author’s argument against gray marketing, isn’t it? Gray marketing, the author contends, is an unjust practice because it threatens the business reputations of manufacturers: reputations that they have built up by treating consumers properly. This points straight to correct  choice (B).

(A)  The author doesn’t fault manufacturers (the trademark owners) for anything; and, indeed, is very sympathetic to their position. Perhaps you axed this one because of the phrase  “consumer complaints,”  an issue that shows up nowhere in the passage.

(C)  The difference between gray marketing within and across markets, which comes up in the first couple of paragraphs’s, is completely irrelevant to the issue of goodwill. Besides, the author never says that gray marketing across markets is a tougher problem than gray marketing within markets.

(D)  can be tossed out for the simple reason that threats to goodwill injure manufacturers, not gray marketers.

(E)  The fact that some consumers purchase gray market products indicates that they are willing to sacrifice service in order to get a reduced price. In any case, this isn’t the reason the author talks about goodwill.

Answer: B

Sajjad1994 · Answer

Explanation

2. The function of the passage as a whole is to

Explanation

We are looking for a choice that accurately summarizes both the tone and content of the entire passage. That’s  (D) . The author describes gray marketing in the  first two paragraphs , denounces it in the  third , and judges several legal theories for regulating it in the  last paragraph.

(A) ’s outside the scope of the passage. The author really has nothing critical to say about gray marketers, but rather criticizes the practice itself.

(B)  and  (C) , in contrast, are too narrow in scope. While the first three paragraphs discuss channel flow diversion, parallel importation, and their harmful effects,  choice (B)  completely ignores the legal dimension of gray marketing. Conversely, while  choice (C)  addresses the legal dimension of gray marketing, it totally ignores all of the stuff in the  first three paragraphs.

(E)  has the opposite problem of  (B)  and  (C) ; it’s way too broad in scope. This passage is about one specific marketing practice: gray marketing.

Answer: D

Sajjad1994 · Answer

Explanation

1. Which one of the following best expresses the main point of the passage?

Explanation

You’re looking for the choice that captures both the tone and content of the entire passage. Well, in the context of a general discussion of gray marketing—what it is, how it works, who it injures, and how it is addressed by the legal system—the author denounces the practice as unfair to trademark owners and recommends a legal remedy for it.  (A)  catches all of this.

None of the incorrect choices really captures either the author’s negative attitude toward gray marketing or optimistic outlook about placing legal controls on it. But they can all be eliminated for other reasons as well.

(B)  and  (D)  are both too narrow in scope. The passage goes well beyond a mere description of how gray marketing works,  (B) , and  “the futility of trying to regulate it”  flies in the face of the author’s prediction at the end. The passage also goes beyond a general description of legal decisions involving the practice,  (D) . Another problem with  (D)  is that according to the author, two of the three theories result in the same legal outcome.

(C)  and  (E) , on the other hand, are outside the scope of the passage. Nothing is ever said to the effect that putting a stop to gray marketing within markets is a different ball game than putting a stop to it across markets,  (C) . In fact, at the beginning of the last para, the author makes a point of telling us that current legal theories for controlling gray market activities have thus far been applied only to cases across markets.

As for (E) , the passage never claims that current legal theories have increased the amount of gray marketing activity. True, two of them do nothing to curb it, but that’s very different from saying that they encourage it.

Answer: A

Gray marketing, the selling of trademarked products through channels

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GMAT Reading Comprehension (RC) Questions

Gray marketing, the selling of trademarked products through channels

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