I've thought a lot about the real dynamics of the so-called 'grey market' for watches and the degree to which the manufacturers have an interest in keeping it alive.
Going back to some of the things that I learned about in B school; it seems like the luxury watch market would make the perfect case study for the clandestine and well executed practice of price discrimination.
As the theory goes, it's advantageous to be able to sell the same product to various segments of the market at the highest price that they are willing to pay for it. It's best, of course, if you are interested in preserving the integrity of the brand; to do this by convincing those who are willing to pay the higher price that they are getting something that's somehow different from those who are paying the lowest price. Most people won't pay more simply because they can, they need to perceive some additional value in parting with the extra money.
Certainly much is made about the importance of only buying from an 'Authorized Dealer' and there's a large segment of watch collectors who would never buy a new watch anywhere else. A great deal of time and money has been spent to convince us that deviating from the officially sanctioned route for acquiring a new watch is fraught with all sorts of peril: Will the watch be authentic? Will the warranty be honored if there's a problem? Is it stolen? Is it really new? Will it even arrive on your doorstep after you share you credit card details with a stranger who is a thousand miles away?
To keep the dream alive and maximize the drama (and profit margin), there's the sometimes comical dog and pony show that you'll encounter when you venture down the discount path with your 'Authorized Dealer' (AD). You know the one.... where they'll lose the whole line and the multi-million dollar inventory will vanish overnight if the manufacturer finds out that they gave even their best customer a 20% discount. It's important for the maximization of the strategy to keep the premium buyer paying the premium price at the authorized shop so that the bargain hunter still feels like he or she is getting a deal when the Grey Market seller offers him or her a 25 or 30% savings.
It seems to me like that real charm of the arrangement in the watch business, at least from the perspective of the manufacturer, is that the dealers (both authorized and unauthorized) take care of all of the dirty work and absorb most of the grief.
By requiring the Authorized Dealer to take on more watches than they can feasibly sell, the manufacturer all but insures the creation of an arrangement between the AD and a grey market vendor. Obviously, while this can't be officially sanctioned or suggested, the manufacturer absolutely needs this 'off the record' distribution channel to move the most product possible. While they remain unrecognized and sometimes even maligned, grey market 'dealers' do sell a lot of watches.
In 'encouraging' the AD to hold the line on price with clients who see the value in the AD relationship and will pay a premium for it, the manufacturer sets up the value proposition that the grey market dealer needs to convince the clients that value the best price above all else that they are, in fact, getting a deal!
