Final answer:
Gray markets refer to the sale of products below cost in order to get rid of excess inventory and undermine competition. There are two possible explanations for gray markets: the sinister explanation and the innocent explanation.
Step-by-step explanation:
In the context of business, gray markets refer to the sale of products below cost to get rid of excess inventory and to undermine competition.
However, it's important to note that there can be two different explanations for gray markets: the sinister explanation and the innocent explanation.
The sinister explanation suggests that foreign firms sell goods at prices below the cost of production for a short period of time to drive out domestic U.S. competition.
Once the competition is eliminated, they can then raise prices. Economists refer to this scenario as predatory pricing.
On the other hand, the innocent explanation suggests that market forces like demand and supply set market prices, not just the cost of production.
For example, if there is excess supply of a particular product, the market price may drop below the cost of production.
In this case, selling the product below cost is a result of the market in action, not an intentional strategy to eliminate competition.