Chap014Questions.docx

Chap014Questions.docx

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Chap014Questions

Chapter14–PricingforInternationalMarkets

DiscussionQuestions

1.

Define:

Dumping

Skimming

Compensationdeal

Countertrade

Parallelimports

Variable-costpricing

PriceEscalation

Full-costpricing

Exclusivedistribution

Barter

Productbuy-back

Counterpurchase

Administeredpricing

Transferpricing

Countervailingduty

AdvancedPricingAgreement（APA）

Cartel

2.Discussthecausesandsolutionsofparallelimportsandtheireffectonprice.

Parallelimportsdevelopwhenimportersbuyproductsfromdistributorsinonecountryandselltheminanothertodistributorswhoarenotpartofthemanufacturer’sregulardistributionsystem.Thispracticeislucrativewhenwidemarginsexistbetweenpricesforthesameproductsindifferentcountries.Thereareavarietyofconditionsthatcancreatetheprofitableopportunityforaparallelmarket.

Variationsinthevalueofcurrenciesbetweencountriesfrequentlyleadtoconditionsthatmakeparallelimportsprofitable.WhenthedollarwashighrelativetotheWestGermanmark,CabbagePatchdollswerepurchasedfromGermandistributorsatwhatamountedtoadiscountandresoldintheUnitedStates.

Purposefullyrestrictingthesupplyofaproductinamarketisanotherpracticethatcancauseabnormallyhighpricesandthusmakeaparallelmarketlucrative.SuchwasthecasewiththeMercedes-BenzautomobilewhosesupplywaslimitedintheU.S.AmericanscouldbuyaMercedes-BenzautomobilewhichwaspartiallysuppliedbyAmericansreturningtotheUnitedStateswithcarstheycouldsellfordoublethepricetheypaidinGermany.Thissituationpersisteduntiltherelativevalueofthedollartothemarkweakenedandthepricedifferentialcreatedbylimiteddistributionevaporated.

Pricingpoliciesthatpermitlargepricedifferentialsbetweencountrymarketsisanotherconditionconducivetothecreationofparallelmarkets.JapanesemerchantshavelongmaintainedveryhighpricesforconsumerproductssoldwithintheJapanesemarket.Asaresult,pricesforJapaneseproductssoldinothercountriesareoftenlowerthantheyareinJapan.Forexample,JapanesecanbuyCannonCamerasfromNewYorkcatalogueretailersandhavethemshippedtoJapanforapricebelowthatofthecamerapurchasedinJapan.Inadditiontothehigherpricesforproductsathome,therisingvalueoftheyenmakesthesepricedifferentialsevenwider.Forexample,theNewYorkpriceforPanasoniccordlesstelephonesis$59.95versus$152inTokyoandtheSonyWalkmanis$89.00versus$165.23.

ForeigncompaniesdoingbusinessinJapangenerallyfollowthesamepatternofhighpricesfortheproductstheysellinJapan,thuscreatinganopportunityforparallelmarketsintheirproductsalso.EastmanKodakpricesitsfilmhigherinJapanthaninotherpartsofAsia.EnterprisingmerchantsbuyKodakfilminSouthKoreaforadiscountandresellitinJapanat25%lessthantheauthorizedJapaneseKodakdealers.Forthesamereasons,Coca-ColasyrupimportedfromLosAngelesischeaperthanthatpurchasedthroughnormalchannelsinJapan.

Thepossibilityofparallelmarketoccurswheneverpricedifferencesaregreaterthanthecostoftransportationbetweentwomarkets.InEurope,becauseofdifferingtaxesandcompetitivepricestructures,pricesforthesameproductvarybetweencountries.Whenthisoccurs,itisnotunusualforcompaniestofindthemselvescompetinginonecountrywiththeirownproductsimportedfromalowerpricedcountry.

PerfumeanddesignerbrandslikeGucciandCartierareespeciallypronetograymarkets.Tomaintaintheimageofqualityandexclusivity,pricesforsuchproductstraditionallyincludehighprofitmarginsateachlevelofdistribution,differentialpricesamongmarkets,limitedquantities,anddistributionthatisrestrictedtoupscaleretailers.IntheU.S.,wholesalepricesforexclusivebrandsoffragrancesareoften25%morethanwholesalepricesinothercountries.ThesearetheidealconditionsforalucrativegraymarketforunauthorizeddealersinothercountrieswhobuymorethantheyneedatwholesalepriceslowerthanU.S.wholesalerspay.TheythenselltheexcessataprofittounauthorizedU.S.retailers,butatalowerpricethantheretailerwouldhavetopaytoanauthorizedU.S.distributor.

Topreventparallelmarketsfromdevelopingwhensuchmarketingandpricingstrategiesareused,companiesmustmaintainstrongcontrolsystems.Thesecontrolsystemsaredifficulttomaintainandthereremainsthesuspicionthatsomecompaniesarelessconcernedwithcontrollinggraymarketsthantheyclaim.

3.Whyisitsodifficulttocontrolconsumerpriceswhensellingoverseas?

Therearemanyvariableswhichmustbeconsideredwhenattemptingtocontrolconsumerpricesoverseas.Amongtheseare:

tariffsonimports,“dumping”tariffs,salestaxes,distributivechannelcosts,addedmiddlemencosts,andshippingcosts.Itisverydifficulttocontrolconsumerpriceswhensellingoverseas.Priceescalationisoneofthemainreasons,aspricesescalatedifferently.Someprofiteeringisalsofoundinsomecountries,thusupsettinganyconsumerpricecontrol.Dumping,beingdefineddifferently,istreateddifferentlyundervariouslawsmakingformorevariedprices.Firmsoperatingoverseashavelesswaystoprotectthemselvesfrompricevariationsandfluctuatingexchangeratesalsotendtoincreasepricefluctuations.Inaddition,manyretailersoverseasdon’tlikepricecompetitionandavoiditifpossiblebyraisingorloweringtheirprices.

4.Explaintheconceptof“priceescalation”andtellwhyitcanmisleadaninternationalmarketer.

Priceescalationispriceincreasesduetoaddedcostsproducedbysuchthingsastariffs,taxes,longerlinesofdistribution,etc.Itcanmisleadmanyinternationalmarketersintothinkingthatexorbitantpricesthatarechargedinforeigncountriesforgoodsthatarerelativelyreasonableinthedomesticmarketcanincreaseprofitsintheforeignmarket.Thisisjusttheoppositeoftherealcaseinmanysituationswheretheeffectsforpriceescalation,notaddedprofit,accountforthehighprices.

5.Whatarethecausesofpriceescalation?

Dotheydifferforexportsandgoodsproducedandsoldinaforeigncountry?

Someofthecausesofpriceescalationare:

a.profiteering

b.shippingcosts

c.longerchannelsofdistribution

d.largermiddlemenmargins

e.specialtaxes

Exportsmaybesubjecttoalloftheabove,butmanytimesgoodsproducedandsoldinaforeigncountrymayhavereducedshippingcosts,lowertariffs,andaresubjecttofewerspecialtaxes.

6.Whyisitseldomfeasibleforacompanytoabsorbthehighcostofinternationaltransportationandreducethenetpricereceived?

Acompanycanseldomreducetheirpricetoanoverseasmarket（byabsorbingtransportationcosts,forexample）becauseifthepricesarelowerthancompetitioninthecountryoforiginorlowerthannormalexportprices,“dumpingtariffswilljustraisethepricebackupbyinducinganewcostonthemanufacturer.”

7.Priceescalationisamajorpricingproblemfortheinternationalmarketer.Howcanthisproblembecounteracted?

Discuss.

Thekeytocounteractingtheproblemofpriceescalationcentersonanymethodthatwillreducethepriceoftheproduct,tariffs,oranyothercostinmarketingtheproduct.Someofthemorefrequentlyusedmethodsare:

（1）offsettingtariffsandtransportationchargesbythenetpriceforgoodssoldinforeignmarkets.Aproblemwhichmayariseherehoweveristhepossibilitythattheimportingcountrywillconsiderthismoveasdumping.

（2）Modifytheproductinawaythattariffsarereduced.Forexample,assembleintheforeigncountrywhichmaylowerthetariffandtransportationcosts.Theforeigntradezoneisespeciallyusefulinthisprocess.（3）Manufacturewithinthecountrytherebyeliminatingtariffsandperhapsalsobenefitingfromlowerlaborcosts.（4）Shortenthechannelsofdistributionespeciallyinthosecountriesthathavevalueaddedtaxesorturnovertaxes.（5）Eliminatecostlyfunctionalfeaturesontheproducttherebyreducingtheoverallcostandprice.ForU.S.productsthisisareasonablealternativesinceformanymarketsU.S.productshaveunwantedorunnecessaryfunctionalfeatures.Inaddition,dependingonmarketneeds,theoverallqualityoftheproductmayalsobelessenedinordertolowerthecostofgoods.

Inallofthesesituationsthemainthrustistolowerentrycostoftheproducttherebyloweringthetariffsandthetransportationcostwhicharethetwomajorcontributorstopriceescalation.

8.Changingcurrencyvalueshaveanimpactonexportstrategies.Discuss.

Inadditiontotherisksfromexchangeratevariationsotherrisksresultfromchangingvaluesofacountry’scurrencyrelativetoothercurrencies.AstrongdollarproducespriceresistancesinceittakesalargequantityoflocalcurrencytobuyaU.S.dollar.Conversely,whentheU.S.dollarisweak,demandforU.S.goodsincreasessincefewerunitsofforeigncurrencyareneededtobuyaU.S.dollar.Eachadditionalmarketinwhichacompanyoperatesaddstotheproblem.Currency-exchangerateswingsareconsideredbymanyglobalcompaniestobeamajortradebarrier.Foracompanywhoselongrangeplanscallforcontinuedoperationinforeignmarketsandwhowantstoremainpricecompetitive,pricestrategiesneedtoreflectvariationsincurrencyvalues.Whenthevalueofthedollarisweakrelativetothebuyer’scurrency（i.e.,ittakesfewerunitsoftheforeigncurrencytobuyadollar）,companiesgenerallyemploycostpluspricing.Toremainpricecompetitivewhenthedollarisstrong（i.e.,whenittakesmoreunitsoftheforeigncurrencytobuyadollar）,c