Rice Business Professor Amit Pazgal found that in certain situations, gray markets can actually help manufacturers and retailers. Photo by Science in HD on Unsplash

A camera store in Taiwan buys Nikon cameras from an electronics shop in the Philippines, where photo equipment is cheaper. Then the store sells them to consumers in Taiwan at a lower price. The camera comes without a warranty and instructions are in Filipino – the buyers in Taiwan are happy to have a real Nikon for a lower cost.

The sellers and customers are operating in the so-called gray market – where genuine products are sold through unauthorized channels. Gray marketers buy goods in markets with lower prices, then ship them to a market with higher prices, where they will likely sell for a profit. Though the products are identical, consumers typically see gray market goods as inferior since they often lack benefits like after-sale services or warranty coverage.

For years, gray markets have posed a significant threat to both manufacturers and retailers, depriving both of customers and profits. It's estimated that around $7 billion to $10 billion in goods enter the U.S. market through gray market channels every year. The IT industry, for one, loses approximately $5 billion a year due to gray market activities.

No specific laws in the U.S. ban this practice outright, however. As a result, in recent years, retailers are increasingly taking advantage of potentially cheaper prices abroad, personally importing or using third parties to buy original goods not meant for direct sale in the United States – and then selling them here for less. Alibaba, China's most extensive online shopping site, offers its hundreds of millions of shoppers a large array of gray market goods to peruse.

Manufacturers usually respond to gray markets with knee-jerk hostility, urging customers to avoid gray market goods and even filing lawsuits against gray market peddlers. Nikon, for example, includes a website section to educate consumers on how to identify gray market products, to shun the gray market.

But is gray market commerce always destructive? Rice Business Professor Amit Pazgal joined then-Rice Business Ph.D. student Xueying Liu (now an assistant professor at Nankai University) to explore scenarios in which gray markets could be good for both manufacturers and retailers. Testing the theory in recent research, Pazgal and Liu found that there are indeed situations in which both manufacturers and retailers can profit thanks to gray markets, while the associated product also improves in quality.

To reach these conclusions, the researchers started by recruiting 118 participants between the ages of 25 and 45 to complete a gray market product survey. They found the majority had no problem buying gray market goods. Only 3 percent of consumers wouldn't consider buying cosmetics from a gray marketer, while 6 to 7 percent wouldn't buy electronics. Despite this, more than 90 percent of participants who were willing to buy required a price discount of 20 to 30 percent, showing the goods were seen as slightly inferior.

The researchers then tested responses to a model of a manufacturer selling a single product to two markets – or countries – that differed in size and in customer willingness to pay for the product. Consumers in one market would pay more, on average, for quality. For example, the Nikon D500 camera is sold for a 7.5 percent premium in Taiwan versus Thailand and a 10 percent price premium in Taiwan versus the Philippines.

Pazgal and Liu found that when the manufacturer sells their product directly to consumers in both markets when there is also a gray market, both the manufacturer's profit and product quality decrease. But when the same manufacturer sells their product indirectly to a retailer in at least one of these markets, both the manufacturer's and the retailer's profits can increase. So can the product's quality.

This occurs for several reasons. First, gray marketers increase total demand and profit for the retailer in the lower-priced market, or in the market where the gray marketer buys their goods. The manufacturer can set a higher wholesale price for the better quality product in a market where consumers pay more, and increase sales in both markets as consumers compare the regular, high-quality product to the gray market one. In fact, by offering a lower-priced, lower quality (that is, gray market) alternative to its own high-quality product, the manufacturer can better segment consumers in the higher-priced market.

Finally, the retailer in the higher-priced market becomes more profitable even though they lose some customers to the gray market. This is because increased product quality and price more than make up for lost sales. Researchers found that the results hold regardless of whether the gray marketer buys from the manufacturer or a retailer.

The bottom line: in certain situations, gray markets can improve profitability for both manufacturers and retailers (and, of course, the gray marketers). Counterintuitive though it is, manufacturers that sell through retailers shouldn't automatically see gray markets as an obstacle to their profits, rushing to demand that governments and courts shut them down. Instead, in some cases, companies could do well to embrace these gray markets, because they lead to overall improved profits.

Manufacturers can use this information to their advantage, Pazgal noted. Nikon, for example, could introduce a higher quality camera to the market, allowing it to set even higher wholesale prices and increase sales in both markets, far exceeding the cost of the higher quality product.

For consumers, meanwhile, gray markets are always beneficial because of lower prices. If companies heed Pazgal's findings, however, customers could also benefit from more innovative and higher quality cameras and other merchandise, as manufacturers hurry to create better products to bump up their profits.

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This article originally ran on Rice Business Wisdom and is based on research from Amit Pazgal, the Friedkin Professor of Management – Marketing at the Jones Graduate School of Business.

Turns out, timing is everything when launching a new tech product, this reacher found for Rice Business Wisdom. rawpixel.com /Pexels

Rice University researcher discovers what makes a tech product stand out in a crowd

Houston Voices

From smart phones to video games to virtual reality toys, new products roll forward as relentlessly as the tides. So what, and how, should you tell consumers about your product to avoid being swept away in a sea of similar wares?

To answer this question, Rice Business professor Amit Pazgal and colleague Yuanfang Lin of Conestoga College dove into the particulars of how companies differentiate their products by informing consumers about a new product's quality.

The rush of new products, they note, is particularly intense in technology, where innovations are constant — which means consumers constantly need information about them. Traditionally, tech companies make the case for their products using advertising, free sample, product trials and splashy product demonstrations. (See your local Apple Store).

But how does a consumer's wish for information interact with their ultimate buying decision?

Timing, Pazgal and Lin found, plays a powerful role in the type of information that best influences consumers. Suppose, for example, Firm 1 offers a new product, say a smartphone with innovative features. This makes Firm 1 a pioneer. For a certain golden period, Firm 1 might hold a monopoly in the market, since there's simply no other smartphone like theirs. This is the moment, the researchers say, to offer consumers information that reveals the product's true quality and uniqueness. Because no similar product is out there, Firm 1 has the power to establish the parameters for judging its invention.

Inevitably, of course, another company (call it Firm 2) will come up with something comparable. Thanks to the heavy lifting in innovation by Firm 1, Firm 2 has the luxury to create a phone of equal or greater quality. And this is when the tide starts to turn. One might assume Firm 2 would just inform consumers of the superior quality of its product. But, surprisingly, Pazgal and Lin found that in most cases Firm 2 will instead focus on educating consumers about their preference for quality — in effect, leaving it up to the buyer to decide which of the two phones they really wants.

However, if another firm emerges with a similar product of lesser quality, its marketing will likely take yet another turn. Instead of trying to claim better quality, late entry companies offering an inferior product typically admit outright that their product isn't as well made as other versions.

That's because such firms calculate that if customers discover this themselves, they'll react badly. By telling the truth and pricing appropriately, a firm can find a calm stretch of water elsewhere in the market, someplace where it's not clashing directly with the earlier, higher quality products.

Whether it's Alexa, a smart TV or a virtual reality game, Pazgal and Lin explain, when a product enters the market for the first time, consumers need to be shown how it works. When a second product in the same line is introduced by a different company, the marketing task changes: it's now more important to show consumers how to identify a quality product, and then let them choose for themselves.

Any time a company launches a device or service into the world, in other words, it needs to trust consumers' ability to learn — and not drown them with too much information. Informed what good quality looks like, Pazgal and Lin conclude, consumers will swim on their own to the item they truly want.

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This article originally appeared on Rice Business Wisdom.

Amit Pazgal is Friedkin Chair in Management and Professor of Marketing and Operations Management at Jones Graduate School of Business at Rice University.

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Where to work: These 2024 Houston Innovation Awards finalists are hiring

growing biz

About a third of this year's startup finalists for the Houston Innovation Awards are hiring — from contract positions all the way up to senior-level roles.

The finalists, announced last week, range from the medical to energy to AI-related startups and will be celebrated next month on Thursday, November 14, at the Houston Innovation Awards at TMC Helix Park. Over 50 finalists will be recognized for their achievements across 13 categories, which includes the 2024 Trailblazer Legacy Awards that were announced earlier this month.

Click here to secure your tickets to see which growing startups win.

Let's take a look at where you could land a job at one of Houston's top startups.

Double-digit growth

When submitting their applications for the 2024 Houston Innovation Awards, every startup was asked if it was hiring. Four Houston startups replied that they are growing their teams rapidly.

Houston e-commerce startup Cart.com, one of the city's few $1 billion-plus “unicorns," reported that it is hiring approximately 50 new employees. The company, which focuses on commerce and logistics software development, secured $105 million in debt refinancing from investment manager BlackRock this summer following a $25 million series C extension round that brought Cart.com’s Series C total to $85 million. It currently has about 1,500 employees and 4 offices in three companies since it was founded in 2020, according to its website.

Houston energy tech company Enovate Ai (previously known as Enovate Upstream) reported that it is hiring 10-plus positions. The company, with 35 current employees, helps automate business and operational processes for decarbonization and energy optimization. Its CEO and founder, Camilo Mejia, sat down for an interview with InnovationMap in 2020. Click here to read the Q&A.

Square Robot is hiring about 10 new Houston employees and 15 total between Houston and other markets, according to its application. The advanced robotics company was founded in Boston in 2016 and opened its Houston office in August 2019. It develops submersible robots for the energy industry, specifically for storage tank inspections and eliminating the need for humans to enter dangerous and toxic environments. Last year it reported to be hiring 10 to 30 employees as well, ahead of the 2023 Houston Innovators Award. It currently has 25 Houston employees and about 50 nationally.

InnoVent Renewables LLC is also hiring 15 new employees to be based in Mexico. The company launched last year with its proprietary continuous pyrolysis technology that can convert waste tires, plastics, and biomass into fuels and chemicals. The company scaled up in 2022 and has operations in Pune, India, and Monterrey, Mexico, with plans for aggressive growth across North America and Latin America. It has 20 employees in Mexico and one in Houston currently.

Senior roles

Geothermal energy startup Sage Geosystems reported that it is looking to fill two senior roles in the company. It also said it anticipates further staff growth after its first commercial energy storage facility is commissioned at the end of the year in the San Antonio metro area. The company also recently expanded its partnership with the United States Department of Defense's Defense Innovation Unit and announced this month that it was selected to conduct geothermal project development initiatives at Naval Air Station in Corpus Christi. It has 12 full-time employees, according to its application.

Steady growth

Other companies reported that they are hiring a handful of new workers, which for some will increase headcount by about 50 percent to 100 percent.

Allterum Therapeutics reported that it is adding six employees to its current team of 13. The biopharmaceutical company that is under the Fannin Partners portfolio of med tech companies was awarded a $12 million product development grant from the Cancer Prevention and Research Institute of Texas this spring.

Dauntless XR will add between five and eight employees, according to its application. It currently has four employees. The augmented reality software company, originally founded as Future Sight AR in 2018, recently secured a NASA contract for space weather technology after rebranding and pivoting. The company's CEO, Lori-Lee Elliott, recently sat down with the Houston Innovators Podcast. Click here to hear the interview.

Syzygy Plasmonics is hiring four positions to add to its team of 120. The company was named to Fast Company's energy innovation list earlier this year.

Venus Aerospace is adding five to 10 key hires to its team of 72. Andrew Duggleby founded the company with his wife and CEO Sassie in 2020, before relocating to the Houston Spaceport in 2021. Last year, Venus raised a $20 million series A round, and it successfully ran the first long-duration engine test of their Rotating Detonation Rocket Engine in partnership with the Defense Advanced Research Projects Agency, or DARPA, earlier this year.

​Seeking selectively

Other finalists are adding to their teams with a handful of new hires of contract gigs.

​Future roles

Other finalists reported that they are currently not hiring, but had plans to in the near future.

NanoTech Materials Inc., which recently moved to a new facility, is not currently. Hiring but said it plans with new funding during its series B.

Renewable energy startup CLS Wind is not hiring at this time but reported that it plans to when the company closes funding in late 2024.

Houston-area researchers score $1.5M grant to develop storm response tech platform

fresh funding

Researchers from Rice University have secured a $1.5 million grant from the National Science Foundation to continue their work on improving safety and resiliency of coastal communities plagued by flooding and hazardous weather.

The Rice team of engineers and collaborators includes Jamie Padgett, Ben Hu, and Avantika Gori along with David Retchless at Texas A&M University at Galveston. The researchers are working in collaboration with the Severe Storm Prediction, Education and Evacuation from Disasters (SSPEED) Center and the Ken Kennedy Institute at Rice and A&M-Galveston’s Institute for a Disaster Resilient Texas.

Together, the team is developing and hopes to deploy “Open-Source Situational Awareness Framework for Equitable Multi-Hazard Impact Sensing using Responsible AI,” or OpenSafe.AI, a new platform that utilizes AI, data, and hazard and resilience models "to provide timely, reliable and equitable insights to emergency response organizations and communities before, during and after tropical cyclones and coastal storm events," reads a news release from Rice.

“Our goal with this project is to enable communities to better prepare for and navigate severe weather by providing better estimates of what is actually happening or might happen within the next hours or days,” Padgett, Rice’s Stanley C. Moore Professor in Engineering and chair of the Department of Civil and Environmental Engineering, says in the release. “OpenSafe.AI will take into account multiple hazards such as high-speed winds, storm surge and compound flooding and forecast their potential impact on the built environment such as transportation infrastructure performance or hazardous material spills triggered by severe storms.”

OpenSafe.AI platform will be developed to support decision makers before, during, and after a storm.

“By combining cutting-edge AI with a deep understanding of the needs of emergency responders, we aim to provide accurate, real-time information that will enable better decision-making in the face of disasters,” adds Hu, associate professor of computer science at Rice.

In the long term, OpenSafe.AI hopes to explore how the system can be applied to and scaled in other regions in need of equitable resilience to climate-driven hazards.

“Our goal is not only to develop a powerful tool for emergency response agencies along the coast but to ensure that all communities ⎯ especially the ones most vulnerable to storm-induced damage ⎯ can rely on this technology to better respond to and recover from the devastating effects of coastal storms,” adds Gori, assistant professor of civil and environmental engineering at Rice.

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This article originally ran on EnergyCapital.

3+ Houston innovators to know this week

who's who

Editor's note: Every week, I introduce you to a handful of Houston innovators to know recently making headlines with news of innovative technology, investment activity, and more. This week's batch includes a drone tech startup founder, biotech investor, and health care innovator.

Divyaditya Shrivastava, co-founder of Paladin

Paladin’s AI-enhanced autonomous drones help public safety agencies, such as police and fire departments, respond to 911 calls. Photo via LinkedIn

Houston-based Paladin, whose remotely controlled drones help first responders react quickly to emergencies, has collected $5.2 million in seed funding.

Gradient, a seed fund that backs AI-oriented startups, led the round. Also participating were Toyota Ventures, the early-stage VC arm of Japanese automaker Toyota; venture capital firm Khosla Ventures; and VC fund 1517. The company was co-founded by Divyaditya Shrivastava and Trevor Pennypacker.

Among the agencies that have tried out Paladin’s technology is the Houston area’s Memorial Villages Police Department. The department participated in a three-month Paladin pilot project in 2019. Read more.

Veronica Breckenridge (née Wu), founder of First Bight Ventures

Veronica Breckenridge, founder of First Bight VenturesInvestor advocates now is the time to position Houston as a leading biomanufacturing hub

Veronica Breckenridge is the founder of First Bight Ventures, which just celebrated three portfolio companies. Photo courtesy

Three portfolio companies of Houston venture capital firm First Bight Ventures have received a combined $5.25 million from the U.S. Defense Department’s Distributed Bioindustrial Manufacturing Program.

“The allocation of funds by the federal government will be critical in helping grow biomanufacturing capacity,” Veronica Breckenridge (née Wu), founder of First Bight, says in a news release. “We are very proud to represent three dynamic companies that are awardees of this competitive and widely praised program.” Read more.

Sunil Sheth, associate professor in the Department of Neurology at McGovern Medical School at UTHealth Houston

UTHealth Houston has secured millions in grant funding — plus has reached a new milestone for one of its projects. Photo via utsystem.edu

UTHealth recently received a grant that will improve the odds for patients who have had a stroke with the successful re-opening of a blocked vessel through endovascular surgery. The $2.5 million grant from the National Institute of Neurological Disorders and Stroke, part of the National Institutes of Health, will fund a five-year study that will include the creation of a machine-learning program that will be able to predict which stroke patients with large blood vessel blockages will benefit most from endovascular therapy.

The investigators will form a database of imaging and outcomes of patients whose blockages were successfully opened, called reperfusion, from three U.S. hospitals. This will allow them to identify clinical and imaging-based predictors of damage in the brain after reperfusion. From there, the deep-learning model will help clinicians to know which patients might go against the tenet that the sooner you treat a patient, the better.

“This is shaking our core of deciding who we treat, and when, and how, but also, how we are evaluating them? Our current methods of determining benefit with imaging are not good enough,” says principal investigator and associate professor in the Department of Neurology at McGovern Medical School at UTHealth Houston, Sunil Sheth. Read more.

Top innovators: 2024 Houston Innovation Awards finalists revealed

Here's what Houston startups and innovators will be honored at the Houston Innovation Awards on November 14. Graphic via Gow Media

After nearly 300 nominations, InnovationMap and its group of judges are ready to reveal the finalists for this year's Houston Innovation Awards.

Taking place on Thursday, November 14, the Houston Innovation Awards celebrates all of Houston's innovation ecosystem — startups, entrepreneurs, investors, mentors, and more. Over 50 finalists will be recognized in particular for their achievements across 13 categories, which includes the 2024 Trailblazer Legacy Awards that were announced earlier this month.

Click here to see the 2024 Houston Innovation Awards finalists.