Herman Miller, Inc. versus ASAL GmbH (Case #27, Notes)
Overview
Price differentials are the primary reason for the existence of gray markets. Data in the Herman Miller vs. ASAL GmbH case attest to the potential for huge price differentials within Europe and support the theory that substantial price differences for nearly identical goods create an opportunity for entrepreneurs to arbitrage the differences.
Exchange rates supplied in the case allow us to evaluate exchange rate fluctuation as a potential explanation for price differentials. Although they had an assembly plant in England, Herman Miller manufactured its keyboard trays and Aeron chairs in the U.S. Since ASAL was acquiring these products in the country of manufacturing origin, the only foreign currency exchange rate that is relevant in this case is DM/$. The Deutshe Mark depreciated 11.6% against the dollar in the seven months from the end of September 1998 to the beginning of June 1999. Therefore, Aeron inventory in Germany purchased before September 30, 1999 could be lower priced in Deutshe Marks relative to new purchases from the United States in May or June of 1999. However, if this were the cause of the price differentials, the gray market goods would flow in the opposite direction. Therefore, it is safe to rule out exchange rate fluctuations as the cause in this case.
Beside currency exchange rates, other underlying reasons for the existence of price differentials include demand differences and segmentation strategies. The problem now more commonly derives from sellers whose strategy includes acting as discriminating monopolists and from opportunistic middleman who break their allegiance to the channel family.
Discriminating monopolists are those firms that set high prices in some market segments/countries. A firm like Herman Miller may choose to price low in one market (e.g., the U.S.) and high in another (e.g., Germany) because customers are more or less price sensitive (elasticity of demand) or because their profit maximizing business model calls for penetrating one market (the U.S.) to achieve economies of scale and skimming another (Germany) to increase overall profits.
Opportunistic behavior by middlemen, in conjunction with price differentials, is another potential cause of parallel channels in international markets. Gray marketing and parallel channels of distribution are in general legal (exceptions include Hong Kong and Taiwan), and the rights of gray marketers and those who create parallel channels of distribution are often protected by law. For instance, the European Commission has levied heavy fines against companies trying to limit gray market transactions within the EU. Volkswagen shoppers from Austria and Germany tried to buy Volkswagen cars in Italy where they were 30% cheaper. When VW ordered its Italian dealers not to sell cars to Europeans from outside Italy, they were fined $110millin by the EU Commission. In Todhunter-Mitchell & Co. Ltd. v. AnheuserBusch Inc. (1994), U.S. courts awarded treble damages to the parallel distributor from the multinational, AnheuserBusch, that interfered in the parallel distribution of Budweiser in the Bahamas. The case of Herman Miller vs. ASAL GmbH demonstrates that where large price differentials continue to exist, international entrepreneurs will continue to find a way to create parallel channels of distribution, driving down consumer prices and making a legal profit.
It is also interesting to note that lack of transparency in pricing and measurements, currency conversion and carrying costs, and shopping and transportation costs, all between countries, have facilitated price differentials within the EU. However, England and Ireland recently converted from miles and pounds to kilometers and kilograms and 12 of 15 EU countries now share a common currency, the euro. Such changes have made pricing and measures much more transparent. The Internet and the elimination of customs between member states have reduced shopping and transportation costs. We expect these changes and the economic forces set in motion will lead to lower price differentials within the expanded EU. The changing scenario has important implications for firms concerned with market entry strategies and international pricing and distribution channels. Price differences between European countries for products can be expected to converge over time, differenced at most by the transportation and transaction costs of parallel channels. An open question remains whether this harmonization of prices across the European market will be driven by the multinational corporations or their accomplices, the gray marketers and their parallel channels of distribution. The opportunities for entrepreneurs in Europe to arbitrage price differences within the EU and EA may improve with the increases in transparency and reduced costs of information and transportation. Nonetheless, if these economic forces cause the convergence of prices across the EEA as postulated, the opportunity may be a fleeting victory for independent international traders who create parallel channels of distribution.