In this study, we investigated how a manufacturer strategically uses green advertising to navigate the complexities of gray markets and enhance overall supply chain profitability when selling through two downstream retailers to two countries (regions). Green advertising, which causes less consumer aversion compared to traditional advertising, is increasingly used as a means to improve corporate reputation. In this framework, the manufacturer first determines the level of green advertising expenditure, then sets the wholesale price, followed by the retailers establishing the retail and gray market product prices, with customers making a final decision on which product to purchase. We found that when consumers do not prefer the green product, green advertising serves as an external signal to address quality information asymmetry, a cost that is solely borne by high-quality manufacturers. The level of investment in green advertising increases with the complexity of the gray market structure. When customers have a green preference, green advertising as an internal signal is a necessary investment for manufacturers and can act as a tool to activate or curb the gray market. Finally, we verified that when the green-gray effect is present, the main conclusions remain valid and green advertising not only affects perceived product quality but also changes consumers' relative valuation of gray products.
Citation: Yafei Yu, Decheng Wen, Xiao Chen. How does green advertising serve as a quality signal in the gray market?[J]. Journal of Industrial and Management Optimization, 2026, 22(5): 2380-2409. doi: 10.3934/jimo.2026087
In this study, we investigated how a manufacturer strategically uses green advertising to navigate the complexities of gray markets and enhance overall supply chain profitability when selling through two downstream retailers to two countries (regions). Green advertising, which causes less consumer aversion compared to traditional advertising, is increasingly used as a means to improve corporate reputation. In this framework, the manufacturer first determines the level of green advertising expenditure, then sets the wholesale price, followed by the retailers establishing the retail and gray market product prices, with customers making a final decision on which product to purchase. We found that when consumers do not prefer the green product, green advertising serves as an external signal to address quality information asymmetry, a cost that is solely borne by high-quality manufacturers. The level of investment in green advertising increases with the complexity of the gray market structure. When customers have a green preference, green advertising as an internal signal is a necessary investment for manufacturers and can act as a tool to activate or curb the gray market. Finally, we verified that when the green-gray effect is present, the main conclusions remain valid and green advertising not only affects perceived product quality but also changes consumers' relative valuation of gray products.
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Yafei Yu, Decheng Wen, Xiao Chen. How does green advertising serve as a quality signal in the gray market?[J]. Journal of Industrial and Management Optimization, 2026, 22(5): 2380-2409. doi: 10.3934/jimo.2026087
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