Chapter Six

International pricing decision

In any country, three basic factors determine the boundaries within which market prices should
be set. The first is product cost, which establishes a price floor, or minimum price. Although it is
certainly possible to price a product below the cost boundary, few firms can afford to do this for
extended periods of time. Second, competitive prices for comparable products create a price
ceiling, or upper boundary. Apart from these in international marketing, a firm's costs of doing
business vary widely by county. Differences in transportation charges and tariffs cause the
landed price of goods to vary by country. Differences in distribution practices also affect the
final price the end consumer pays. If an exporter's home country rises in value, the exporter must
choose between maintaining its prices in the home currency and maintaining its prices in the host
country. International marketer must consider these factors in developing their pricing policies
for each national market they serve. They must decide whether they want to apply consistent
prices across all those markets or adapt prices to meet the needs of each. In reaching this
decision, they must remember that competition, culture, channels of distribution, income levels,
and legal requirements, and exchange rate stability may vary widely by country. In addition, in
price setting cognizance must be taken of government tax policies, resale prices, dumping
problems, transportation costs, middlemen and so on. International competition almost always
puts pressure on the prices of domestic companies. A widespread effect of international trade is
to lower prices. Indeed, one of the major benefits to a country of international business is the
favorable impact of international competition on national price levels and, in turn, on a country’s
rate of inflation. Between the lower and upper boundaries for every product there is an optimum
price, which is a function of the demand for the product as determined by the willingness and
ability of customers to buy. As the gray marketing example illustrates, however, sometimes the
optimum price can be affected by arbitrageurs, who exploit price differences in different
countries.

The interplay of these factors is reflected in the pricing policies adopted by companies. With
increasing globalization, there is greater competitive pressure on companies to restrain price
increases. In a globalized industry, companies must compete with other companies from all over
the world. Automobiles are a good example. In the United States, one of the most open and
competitive automobile markets in the world, the fierce struggle for market share by American,
European, Japanese, and Korean companies makes it difficult for any company to raise prices.

If a manufacturer does raise prices, it is important to make sure that the increase does not put the
company’s product out of line with competitive alternatives. Notes John Ballard, chief executive
officer (CEO) of a California-based engineering company said “We thought about price
increases. But our research of competitors and what the market would bear told us it was not
worth pursuing.”
6.1 Basic International Pricing Concepts

As the experience of many companies show, the global manager must develop pricing systems
and pricing policies that address price floors, price ceilings, and optimum prices in each of the
national markets in which his or her company operates.

The task of determining prices in global marketing is complicated by fluctuating exchange rates,
which may bear only limited relationship to underlying costs. According to the concept of
purchasing power parity, changes in domestic prices will be reflected in the exchange rate of the
country's currency. Thus, in theory, fluctuating exchange rates should not present serious
problems for the global marketer because a rise or decline in domestic price levels should be
offset by an opposite rise or decline in the value of the home-country currency and vice versa. In
the real world, however, exchange rates do not move in lockstep fashion with inflation. This
means that global marketers are faced with difficult decisions about how to deal with windfalls
resulting from favorable exchange rates, as well as losses due to unfavorable exchange rates.

A firm's pricing system and policies must also be consistent with other unique global constraints.
Those responsible for global pricing decisions must take into account international transportation
costs, middlemen in elongated international channels of distribution, and the demands of global
accounts for equal price treatment regardless of location. In addition to the diversity of national
markets in all three basic dimensions-cost, competition, and demand-the international executive
is also confronted by conflicting governmental tax policies and claims as well as various types of
price controls. These include dumping legislation, resale price maintenance legislation, price
ceilings, and general reviews of price levels. For example, Procter & Gamble (P&G) encountered
strict price controls in Venezuela in the late 1980. Despite increases in the cost of raw materials,
P&G was granted only about 50 percent of the price increases it requested; even then, months
passed before permission to raise prices was forthcoming. As a result, by 1988 detergent prices
in Venezuela were less than what they were elsewhere.

There are other important internal organizational considerations besides cost. Within the typical
corporation, there are many interest groups and, frequently, conflicting price objectives.
Divisional vice presidents, regional executives, and country managers are each concerned about
profitability at their respective organizational levels. Similarly, the director of international
marketing seeks competitive prices in world markets. The controller and financial vice president
are also concerned about profits. The manufacturing vice president seeks long runs for maximum
manufacturing efficiency. The tax manager is concerned about compliance with government
transfer pricing legislation, and company counsel is concerned about the antitrust implications of
international pricing practices.

Compounding the problem is the rapidly changing global marketplace and the inaccurate and
distorted nature of much of the available information regarding demand. In many parts of the
world, external market information is distorted and inaccurate. It is often not possible to obtain
the definitive and precise information that would be the basis of an optimal price. The same may
be true about internal information.
In Ethiopia, for example, market research is a fairly new concept. Historically, detailed market
information is not accustomed to be gathered or distributed.

There are other problems. When attempting to estimate demand, for example, it is important to
consider product appeal relative to competitive products. Although it is possible to arrive at such
estimates after conducting market research, the effort can be costly and time consuming.
Company managers and executives have to rely on intuition and experience. One way of
improving the estimates of potential demand is to use analogy. This approach basically means
extrapolating potential demand for target markets from actual sales in markets judged to be
similar.

6.2 Environmental Influences on International Pricing Decisions

Global marketers must deal with a number of environmental considerations when making pricing
decisions in addition to the factors covered in domestic marketing. Among these are currency
fluctuations, inflation, government controls and subsidies, competitive behavior, and market
demand. Some of these factors work in conjunction with others; for example, inflation may be
accompanied by government controls. Each consideration is discussed in brief below.

1. CURRENCY FLUCTUATIONS: Fluctuating currency values are a fact of life in international

business. The marketer must decide what to do about this fact. Are price adjustments appropriate
when currencies strengthen or weaken? There are two extreme positions; one is to fix the price of
products in the currency of target country. If this is done, any appreciation or depreciation of the
value of the currency in the country of production will lead to gains or losses for the seller. The
other extreme position is to fix the price of products in home country currency. If this is done,
any appreciation or depreciation of the home-country currency will result in price increases or
decreases for customers with no immediate consequences for the seller.

In practice, companies rarely assume either of these extreme positions. Pricing decisions should
be consistent with the company's overall business and marketing strategy: If the strategy is long
term, then it makes no sense to give up market share in order to maintain export margins. When
currency fluctuations result in appreciation in the value of the currency of a country that is an
exporter, wise companies do things. They may double their efforts to reduce costs. In the short
run, lower margins enable them to hold prices in target markets, and in the longer run, driving
down costs enables them to improve operating margins.

For companies that are in a strong, competitive market position, price increases can be passed on
to customers without significant decreases in sales volume. In more competitive market
situations, companies in a strong-currency country will often absorb any price increase by
maintaining international market prices at pre-revaluation levels. In actual practice, a
manufacturer and its distributor may work together to maintain market share in international
markets. Either party, or both, may choose to take a lower profit percentage. The distributor may
also choose to purchase more products to achieve volume discounts; another alternative is to
maintain leaner inventories if the manufacturer can provide just-in-time delivery. By using these
approaches, it is possible to remain price competitive in markets in which currency devaluation
in the importing country is a price consideration.
If a country's currency weakens relative to a trading partner's currency, a producer in a weak-
currency country can cut export prices to hold market share or leave prices alone for healthier
profit margins. The Euro is a good example. In the first 17 months after the launch of the Euro at
the beginning of 1999, the currency lost nearly a quarter of its value. One option for the
European Central Bank (ECB) was to raise interest rates to strengthen the Euro. While the Euro
remains weak, Germany is enjoying an export boom. The crisis that occurred with the Russian
ruble in 1998 is another good example of how currency fluctuations can affect marketing. Prior
to the devaluation of the ruble from January 1998 to June 1998, the market share for Russian
shampoos, face care products, hair coloring, toothpaste, deodorants, and soaps in Russia was
only 27 percent. When the price of imported products rose dramatically due to the devaluation of
ruble, many Russian women switched to local products. By January to June 2000, the market
share official products rose to 44 percent and had forced some foreign producers out of the
market.

2. EXCHANGE RATE CLAUSES: Many sales are contracts to supply goods or services over
time. When these contracts are between parties in two countries, the problem of exchange rate
fluctuations and exchange risk must be addressed. An exchange rate clause allows the buyer and
seller to agree to supply and purchase at fixed prices in each company's national currency. If the
exchange rate fluctuates within a specified range, say plus or minus 5 percent, the fluctuations do
not affect the pricing agreement that is spelled out in the exchange rate clause. Small fluctuations
in exchange rates are not a problem for most buyers and sellers. Exchange rate clauses are
designed to protect both the buyer and the seller from unforeseen large swings in currencies.

The basic design of an exchange rate clause is straightforward: Review exchange rates
periodically (this is determined by the parties; any interval is possible, but most clauses specify a
monthly or quarterly review), and compare the daily average during the review period and the
initial base average. If the comparison produces exchange rate fluctuations that are outside the
agreed range of fluctuation, an adjustment is made to align prices with the new exchange rate if
the fluctuation is within some range. If the fluctuation is greater than some limit, the parties
agree to discuss and negotiate new prices. In other words, the clause accepts the foreign
exchange market's effect on currency value, but only if it is within the specified range. Anything
less than range does not affect pricing, and anything more than the range opens up a
renegotiation of prices.

3. PRICING IN AN INFLATIONARY ENVIRONMENT: Inflation, or a persistent upward

change in price levels, is a worldwide phenomenon. Inflation requires periodic price adjustments.
These adjustments are necessitated by rising costs that must be covered by increased selling
prices. An essential requirement when pricing in an inflationary environment is the maintenance
of operating profit margins. Regardless of cost accounting practices, if a company maintains its
margins, it has effectively protected itself from the effects of inflation. To keep up with inflation
in our country, for example, the Ethiopian government has resorted to quarterly increases in the
price. In the same way, following this move, we here lots of price increases by different
companies in our country due to the extreme inflation we are experiencing.
Within the scope of this portion, it is possible only to touch on the major accounting issues and
conventions relating to price adjustments in international markets. In particular, it is worth noting
that the traditional FIFO (first -in, first -out) costing method is hardly appropriate for an
inflationary situation. A more appropriate accounting practice under conditions of rising prices is
the LIFO (last-in, first-out) method, which takes the most recent raw material acquisition price
and uses it as the basis for costing the product sold.

In highly inflationary environments, historical approaches are less appropriate costing methods
than replacement cost. The latter amounts to a next-in first-out approach. Although this method
does not conform to generally accepted accounting principles (GAAP), it is used to estimate
future prices that will be paid for raw and component materials. These replacement costs can
then be used to set prices. This approach is useful in managerial decision-making, but it cannot
be used in financial statements. Regardless of the accounting methods used, an essential
requirement under inflationary conditions of any costing system is that it maintains gross and
operating profit margins.

4. GOVERNMENT CONTROLS AND SUBSIDIES: If government action limits the freedom of

management to adjust prices, the maintenance of margins is definitely compromised. Under
certain conditions, government action is a real threat to the profitability of a subsidiary operation.
In a country that is undergoing severe financial difficulties and is in the midst of a financial crisis
(e.g., a foreign exchange shortage caused in part by runaway inflation), government officials are
under pressure to take some type of action. This has been true in Ethiopia since the past few
years. As we all know the government is too much curious about the increasing prices of goods
and services at an alarmic rate in the country and hence taking measures which it believe can
bring change. In some cases, we saw the government taking expedient steps rather than getting at
the underlying causes of inflation and foreign exchange shortages. Such steps might include the
use of broad or selective price controls. When selective controls are imposed, foreign companies
are more vulnerable to control than local businesses, particularly if the outsiders lack the political
influence over government decision-making possessed by local managers.

Government control can also take the form of prior cash deposit requirements imposed on
importers. This is a requirement that a company has to tie up funds in the form of a non-interest-
bearing deposit for a specified period of time if it wishes to import products. Such requirements
clearly create an incentive for a company to minimize the price of the imported product; lower
prices mean smaller deposits. Other government requirements that affect the pricing decision are
profit transfer rules that restrict the conditions under which profits can be transferred out of a
country. Under such rules, a high transfer price paid for imported goods by an affiliated company
can be interpreted as a device for transferring profits out of a country.

Government subsidies can also force a company to make strategic use of sourcing to be price
competitive. In Europe, government subsidies to the agricultural sector make it difficult for
foreign marketers of processed food to compete on price when exporting to the European Union
(EU). In the United States, some, but not all, agricultural sectors are subsidized. For example,
U.S. poultry producers and processors are not subsidized, a situation that makes their prices
noncompetitive in world markets. One Midwestern chicken processor with European customers
sourced its product in France for resale in the Netherlands.
By doing so, the company took advantage of lower costs derived from subsidies and eliminated
price escalation due to tariffs and duties.

5. COMPETITIVE BEHAVIOR: As noted at the beginning of this chapter, pricing decisions are
bounded not only by cost and the nature of demand but also by competitive action. If competitors
do not adjust their prices in response to rising costs, management even if acutely aware of the
effect of rising costs on operating margins-will be severely constrained in its ability to adjust
prices accordingly. Conversely, if competitors are manufacturing or sourcing in a lowermost
country, it may be necessary to cut prices to stay competitive.

6. PRICE AND QUALITY RELATIONSHIPS: Is there a relationship between price and

quality? Do you, in fact, get what you pay for? During the past several decades, studies
conducted have indicated that the overall relationship between price and quality as measured by
consumer testing organizations is quite weak. The authors conclude that the lack of a strong
price-quality relationship appears to be an international phenomenon. This is not surprising when
one recognizes that consumers make purchase decisions with limited information and rely more
on product appearance and style and less on technical quality as measured by testing
organizations.

6.3 Global Pricing Policies

A number of different pricing policies are available to global marketers. An overall goal must be
to contribute to company sales and profit objectives worldwide. Customer oriented strategies
such as market skimming, penetration, and market holding can be used when consumer
perceptions, as determined by the value equation, are used as a guide. Global pricing can also be
based on other external criteria such as the escalation in costs when goods are shipped long
distances across national boundaries. The issue of global pricing can also be fully integrated in
the product design process, an approach widely used by Japanese companies. Prices in global
markets are not carved in stone; they must be evaluated at regular intervals and adjusted if
necessary. Similarly, pricing objectives may vary, depending on a product's life-cycle stage and
the country-specific competitive situation. International marketers generally adopt one of the
three pricing policies:

1) Standard Price Policy: An international marketer following a geocentric approach to

international marketing will adopt a standard price policy. Under standard price policy
the firm charges the same price for its goods and services regardless of where they are
sold. Firms that adopt this policy are generally of two types: first, firms whose products
or services are highly visible and allows price comparisons to be readily made. For
example, Boeing sells aircraft for approximately the same price to airlines worldwide,
regardless of whether the customer is United airlines, Ethiopian airlines, Air India or
British airways. The nationality of the customer is of little importance in the international
marketer's pricing decisions. Second, a firm that sells commodity goods in competitive
markets. For example, crude oil producers, such as Kuwait oil sell their products to any
and all customers at prices determined by supply and demand in the world crude market.
Other commodities and traded worldwide, such as coal and agricultural goods are also
sold at competitive prices with little regard to purchaser's nationality.
2) Two- Tiered Pricing Policy: An international firm that follows an ethnocentric approach will
use two-tiered pricing policy. Under two-tiered pricing policy, the firm sets one price for all its
domestic sales and a second price for all its international sales. A firm that adopts a two-tiered
pricing policy commonly allocates to domestic sales all accounting charges associated with
research and development, administrative overheads, capital depreciation, and so on. The
international marketer can then establish a uniform foreign sales price without having to worry
about covering these costs. Domestic marketers that are just beginning to go international often
use two-tiered pricing policy. In the short run, charging foreign customers a price that covers
only marginal costs may be an appropriate approach for such firms. But the strong ethnocentric
bias of two-tiered pricing policy suggests it is not a suitable long-run pricing strategy. An
international marketer that views foreign customers as marginal to its business - rather than
integrated to it - will never develop the international skills, expertise, and outlook necessary to
compete successfully in international markets. International marketers that adopt a two-tiered
pricing policy are also vulnerable to charges of dumping.

3) Market Pricing Policy: International marketers that follow a polycentric approach to

international marketing use market-pricing policy. Market pricing policy is the most complex of
the three pricing policies and the one most commonly used. An international marketer utilizing
market pricing policy customizes its prices on a market - by - market basis to maximize its
profits in each market. Two conditions must me bet if a international marketer is to successfully
practice market pricing:

(i)The firm must face different demand and / or cost conditions in which it sells its products.

(ii)The firm must be able to prevent arbitrage.

Assuming these conditions are met, the advantages of this polycentric approach are obvious. For
example, the firm can set higher prices where markets will tolerate them and lower prices where
necessary in order to remain competitive. International marketers most likely to use this
approach are those that produce and market their products in many different countries. For
example, Samsung uses market-pricing policy for its line of consumer electronic products. A
market pricing policy can, however expose a firm to dumping complaints as well as to two other
risks: Damage to its brand name and Development of gray market for its products. The
international marketer needs to ensure that the prices it charges in one market do not damage the
brand image it has carefully nurtured in other markets. So, any international marketer that sells
brand-name products and adopts market pricing policy should review the prices charged by local
managers to ensure that the integrity of its brand names ‘and its market images are maintained
across all of its markets. A firm that follows a market pricing policy also risks the development
of gray markets for its products as a result of arbitrage. A gray market is a market that results
when products are imported into a country legally but outside the normal channels of distribution
authorized by the international marketer. A gray market may develop when the price charged in
one market is sufficiently lower than the price charged in another market by the firm. This makes
people to buy in lower priced market and sell in the higher priced market. Thus the firm that has
large price differences among markets is vulnerable to having these differentials undercut by
gray markets.
Gray markets frequently arise when firms fail to adjust local prices after major fluctuations in
exchange prices. Products commonly influenced by gray markets include big-ticket items such as
automobiles, cameras, computers, cell phones, and watches.

Many multinational corporations have attempted to eliminate or control gray markets through
legal action, but few have had much success. Gray market sales undermine international
marketer's market pricing policy and often lower his profits. Gray markets also cause friction
between the international marketer and, its distributors.

Under each of these policies, accompany may follow different pricing strategies which are
clarified below one by one.

1. MARKET SKIMMING: The market skimming pricing strategy is a deliberate attempt to

reach a market segment that is willing to pay a premium price for a product. In such instances,
the product must create high value for buyers. This pricing strategy is often used in the
introductory phase of the product life cycle, when both production capacity and competition are
limited. By setting a deliberately high price, demand is limited to early adopters who are willing
and able to pay the price. One goal of this pricing strategy is to maximize revenue on limited
volume and to match demand to available supply. Another goal of market skimming pricing is to
reinforce customers' perceptions of high product value. When this is done, the price is part of the
total product positioning strategy. When Sony first began selling walkman tape recorders all over
the world, it used a skimming strategy. Harvey Schein, who was president of Sony of America at
the time, recalled the response to the higher price tag. It was fantastic, really. When you have a
new product that is as jazzy as walk man tape recorder for the first time in the world market, you
really skim off the cream of the consuming public. The product was selling for over a thousand
dollars initially. . . . But there were so many wealthy people who wanted to be the first in the
neighborhood that it just went whoof like a vacuum. It flew off the shelf. The initial success of
the walkman tape recorder proved that consumers were willing to pay a high price for a piece of
consumer electronics equipment that would allow them to hear their favorite music at any time
of the day or night at their convenient place.

2. PENETRATION PRICING: Penetration pricing uses price as a competitive weapon to gain

market position. The majority of companies using this type of pricing in international marketing
are located in the Pacific Rim. Scale-efficient plants and low-cost labor allow these companies to
blitz the market. It should be noted that a first-time exporter is unlikely to use penetration
pricing. The reason is simple: Penetration pricing often means that the product may be sold at a
loss for a certain length of time. Companies that are new to exporting cannot absorb such losses.
They are not likely to have the marketing system in place (including transportation, distribution,
and sales organizations) that allows global companies to make effective use of a penetration
strategy. However, a company whose product is not penetrable may wish to use penetration
pricing to achieve market saturation before the product is copied by competitors. When Sony
developed the portable compact disc player, the cost per unit at initial sales volumes was
estimated to exceed $600. Since this was a "no-go" price in the United States and other target
markets, Akio Morita instructed management to price the unit in the $300 range to achieve
penetration. Because Sony was a global marketer, the sales volume it expected to achieve in
these markets led to scale economies and lower costs.
3. MARKET HOLDING: The market holding strategy is frequently adopted by companies that
want to maintain their share of the market. In single-country marketing, this strategy often
involves reacting to price adjustments by competitors. For example, when one airline announces
special bargain fares, most competing carriers must match the offer or risk losing passengers.

In global marketing, currency fluctuations often trigger price adjustments. Market holding
strategies dictate that source country currency appreciation will not be automatically passed on in
the form of higher prices. If the competitive situation in market countries is price sensitive,
manufacturers must absorb the cost of currency appreciation by accepting lower margins in order
to maintain competitive prices in country markets.

4. COST PLUS/PRICE ESCALATION: Companies new to exporting frequently use a strategy

known as cost -plus pricing to gain a toehold in the global marketplace. There are two cost-plus
pricing methods: The older is the historical accounting cost method, which defines cost as the
sum of all direct and I indirect manufacturing and overhead costs. An approach used in recent
years is known as the estimated future cost method. Cost-plus pricing requires adding up all the
costs required to get the product to where it must go, plus shipping and ancillary charges, and a
profit percentage. The obvious advantage of using this method is its low threshold: It is relatively
easy to arrive at a selling price, assuming that accounting costs are readily available. The
disadvantage of using historical accounting costs to arrive at a price is that this approach
completely ignores demand and competitive conditions in target markets. Therefore, historical
accounting cost-plus prices will frequently be either too high or too low in the light of market
and competitive conditions. If historical accounting cost-plus prices are right, it is only by
chance. However, novice exporters do not care-they are reactively responding to global market
opportunities, not proactively seeking them. Experienced global marketers realize that nothing in
the historical accounting cost-plus formula directly addresses the competitive and customer-
value issues that must be considered in a rational pricing strategy. Price escalation is the increase
in a product's price as transportation, duty, and distributor margins are added to the factory price.

Using Sourcing As A Strategic Pricing Tool Against Price Escalation

Price escalation is the increase in a product's price as transportation, duty, and distributor
margins are added to the factory price. The global marketer has several options when addressing
the problem of price escalation. The choices are dictated in part by product and market
competition. Marketers of domestically manufactured finished products may be forced to switch
to lower-income, lower-wage countries for the sourcing of certain components or even of
finished goods to keep costs and prices competitive. The athletic footwear indusrty is an example
of an industry in which the leading companies have opted for low- income, low-wage country
sourcing of their production even companies such as Nike, which continues to market athletic
footwear in the United States and Europe, imports components from lower-income countries
especially South East Asia.

The low-wage strategy option should never become a formula, however. The problem with
shifting production to a low-wage country is that it provides a one-time advantage. This is no
substitute for ongoing innovation in creating value. High-income countries are the home of
thriving manufacturing operations run by companies that have been creative in figuring out ways
to drive down the cost of labor as a percentage of total costs and in creating a unique value.
The Swiss watch industry, which owns the world's luxury watch business, did not achieve and
maintain its preeminence by chasing cheap labor: It continues to succeed because it has focused
on creating a unique value for its Customers. Labor as a percent of the selling price in Swiss
watches is so small that the price of labor is irrelevant in determining competitive advantage. The
other option is a thorough audit of the distribution structure in the target markets.

A rationalization of the distribution structure can substantially reduce the total markups required
to achieve distribution in international markets. Rationalization may include selecting new
intermediaries, assigning new responsibilities to old intermediaries, or establishing direct-
marketing operations.

6.4 Dumping

Dumping is an important global pricing strategy issue. GATT's 1979 Antidumping Code defined
dumping as the sale of an imported product at a price lower than that nominally charged in a
domestic market or country of origin in addition, many countries have their own policies and
procedures for protecting national companies from dumping.

Types of Dumping: There are several types of dumping: sporadic, predatory, persistent, and
reverse.

Sporadic dumping occurs when a manufacturer with unsold inventories warts to get rid of
distressed and excess merchandise. To preserve its competitive position at home, the
manufacturer must avoid starting a price war that could harm its home market. One way to find a
solution involves destroying excess supplies, as in the example of Asian farmers dumping small
chickens in the sea or burning them. Another way to solve the problem is to cut losses by selling
for any price that can be realized. The excess supply is dumped abroad in a market where tee
product is normally not sold.

Predatory dumping is more permanent than sporadic dumping. This strategy involves selling at
a loss to gain access to a market and perhaps to drive out competition. Once the competition is
gone or the market established, the company uses its monopoly position to increase price. Some
critics question the allegation that predatory dumping is harmful by pointing out that if price is
subsequently raised by the firm that does the dumping, former competitors can rejoin the market
when it becomes more profitable again.

Persistent dumping is the most permanent type of dumping, requiring a consistent selling at
lower prices in one market than in others. This practice may be the result of a firm's recognition
that markets are different in terms of overhead costs and demand characteristics. For example, a
firm may assume that demand abroad is more elastic than it is at home. Based on this perception,
the firm may decide to use incremental or marginal-cost pricing abroad while using full-cost
pricing to cover fixed costs at home. This practice benefits foreign consumers, but it works to the
disadvantage of local consumers. Japan, for example, is able to keep prices-high at home,
especially for consumer electronics, because it has no foreign competition there. But it is more
than willing to lower prices in the U.S market .in order to gain or maintain market share.
Japanese consumers, as a result, must "Sacrifice by paying higher prices for Japanese products
that are priced much lower in other markets.
The three kinds of dumping just discussed have one characteristic in common: each involves
charging lower prices abroad than at home. It is possible, however, to have the opposite tactic-
reverse dumping. In order to have such a case, the overseas demand must be less elastic, and the
market will tolerate a higher price. Any dumping will thus be done in the manufacturer's home
market by selling locally at a lower price.

6.5 Transfer Pricing

Transfer pricing refers to the pricing of goods and service bought and sold by operating units or
divisions of a single company. In other words, transfer pricing concerns intra-corporate
exchanges-transactions between buyers and sellers that have the same corporate parent. For
example, Toyota subsidiaries sell to, and buy from, each other. The same is true of other
companies operating globally. As companies expand and create decentralized operations, profit
centers become an increasingly important component in the overall corporate financial picture.
Appropriate intra-corporate transfer pricing systems and policies are required to ensure
profitability at each level. When a company extends its operations across national boundaries,
transfer pricing takes on new dimensions and complications. In determining transfer prices to
subsidiaries, global companies must address a number of issues, including taxes, duties and
tariffs, country profit transfer rules, conflicting objectives of joint venture partners, and
government regulations.

There are three major alternative approaches to transfer pricing. The approach used will vary
with the nature of the firm, products, markets, and the historical circumstances of each case. The
alternatives are (1) cost-based transfer pricing, (2) market-based transfer pricing, and (3)
negotiated prices.

1. COST-BASED TRANSFER PRICING: Because companies define costs differently, some

companies using the cost-based approach may arrive at transfer prices that reflect variable and
fixed manufacturing costs only. Alternatively, transfer prices may be based-on full costs,
including overhead costs from marketing, research and development (R&D), and other
functional areas. The way costs are defined may have an impact on tariffs and duties on sales to
affiliates and subsidiaries by global companies. Cost-plus pricing is a variation of the cost-based
approach. Companies that follow the cost-plus pricing method are taking the position that profit
must be shown for any product or service at every stage of movement through the corporate
system. In such an instance, transfer prices may be set at a certain percentage of fixed costs, such
as "110 percent of cost" While cost-plus pricing may result in a price that is completely unrelated
to competitive or demand conditions in international markets, many exporters use this approach
successfully.

2. MARKET-BASED TRANSFER PRICE: A market based transfer price is derived from the
price required to be competitive in the international market. The constraint on this price is cost.
However, as noted previously, there is a considerable degree of variation in how costs are
defined. Because costs generally decline with volume, a decision must be made regarding
whether to price on the basis of current or planned volume levels. To use market-based transfer
prices to enter a new market that is too small to support local manufacturing, third-country
sourcing may be required. This enables a company to establish its name or franchise in the
market without committing to a major capital investment.
3. NEGOTIATED TRANSFER PRICES: A third alternative is to allow the organization's
affiliates to negotiate transfer prices among themselves. In some instances, the final transfer
price may reflect costs and market prices, but this is not a requirement. The gold standard of
negotiated transfer prices is known as an arm's-length price: the price that two independent,
unrelated entities would negotiate.

6.6 Cartels

A cartel exists when various companies producing similar products or services work together to
control markets for the types of goods and services they produce. The cartel association may use
formal agreements to set prices, establish levels of production and sales for the participating
companies, allocate market territories, and even redistribute profits. In some instances, the cartel
organization itself takes over the entire selling function, sells the goods of all the producers and
distribute the profits. The economic role of cartels is highly debatable, but their proponents argue
that they eliminate cutthroat competition and “rationalize” business, permitting greater technical
progress and lower prices to consumers. However, in the view of most experts, it is doubtful that
the consumer benefits very often from cartels.

The Organization of Petroleum Exporting Countries (OPEC) is probably the best-known

international outlet. Its power in controlling the price of oil resulted from the percentage of oil
production it controlled. In the early 1970s, when OPEC members provided the industrial world
with 67 percent of its oil, OPEC was able to quadruple the price of oil. The sudden rise in price
from $10 or $12 barrel to $140 a barrel today is a primary factor in throwing the world into a
major recession. Consider as an example our country Ethiopia. Imagine how the recent
adjustments on prices of petroleum products affected our economy in general and each of us in
particular. Even if we can mention some other additional things as reason, it is doubtless that this
petroleum price adjustment played significant role in the recent inflation we are experiencing and
will do the same in the future. Oil-exporting countries benefited from the price increase while net
importers of foreign oil suffered economic downturns. Among Third World countries, those
producing oil prospered while oil importers suffered economically from the high prices.

One important aspect of cartels is their inability to maintain control for indefinite periods. Greed
by a cartel member and other problems generally weaken the control of the cartel. OPEC’s
control began to erode as member nations began violating production quotas, users were taking
effective steps for conservation, and new sources of oil production by non-OPEC members were
developed.

A lesser-known cartel but one that has a direct impact on international trade is the shipping cartel
that exists among the world’s shipping companies. Every two weeks about 20 shipping-line
managers gather for their usual meeting to set rates on tens of billions of dollars of cargo. They
do not refer to themselves as a cartel but rather operate under such innocuous names as “The
Trans-Atlantic Conference Agreement.” Regardless of the name, they set the rates on about 70
percent of the cargo shipped between the United States and Northern Europe. Shipping between
the United States and Latin America ports and between the United States and Asian ports also is
affected by shipping cartels. Not all shipping lines are members of cartels, but a large number are
and thus they have a definite impact upon shipping.
6.7 Sale and Forms Of Payment In International Marketing

6.7.1 Terms of sale

Terms of sale or trade terms differ from country-to-country so international chamber of

commerce has come up with standard international trade terms. International terms indicate how
buyers and seller divide risks and obligations and therefore, the costs of specific kinds of
international trade transactions. When quoting prices it is important to make them meaningful.
The most commonly used international trade terms include:

Ex-Works (EXW) or Ex-Named point of origin

Ex means from and the price quoted is calculated from the point of origin. There are several
variation of this term and they include ex factory, ex warehouse, ex mill, ex-works, under these
terms, the sellers makes good available for the buyer at a specific time and place, usually at the
seller’s place of business or warehouse.

FAS – Named port of shipment

FAS stand for free alongside ship. Under this term the price includes delivery of goods along
side the vessel or other mode of transportation and the seller pays all charges up to that point.
This term does not include the cost of loading.

FOB Named Point

FOB stands for Free on Board. Like the other terms with in the quotation, the point where the
price is applicable must be mentioned. There are a number of classes, and the point in question
may be any one of these:

 The named inland carrier at the named inland point of departure;

 The named inland carrier at the named point of exportation;
 The named port of shipment; and
 The named inland point in the country of importation.
Nevertheless, the point used for quotation is usually the port of export. In such a case the price
includes local delivery and loading.

C&F – to named point of destination (CFR)

C & F stands for cost and freight. Usually this term will name the overseas port of import as the
point in question. The price, generally includes the cost of transportation to the named point of
debarkation. The buyer, in turn, is expected to pay for insurance. Like FOB, the risk of loss or
damage to the goods is transferred from the seller to the buyer when the goods pass the ships rail.

CIF – to named point of destination

CIF stands for cost, insurance, and freight. The point used for quotation can be any location.
But the international chamber of commerce recommends that this point should be the destination.
The CIF price includes the cost of goods, insurance and all transportation charges to the point of
debarkation (destination). Although the price covers more items of activities than FOB, the
seller’s obligation still end at the same stage (when goods arte aboard and loaded) etc.
 FCA – Free Carrier: the seller hands over the goods, cleared for export, into the custody of
the first carrier (named by the buyer) at the named place. This term is suitable for all modes
of transport, including carriage by air, rail road, and containerized modes of transport,
including carriage by air, rail road, and containerized/ multi-model transport.
CRF – Cost and Freight: seller must pay the costs and freight to bring the goods to the port of
destination. However, risk is transferred to the buyer once the goods have crossed the ship's
rail. Maritime transport only.
CPT – Carriage paid To: the general /containerized/ multi equivalent of CFR. The seller pays
for carriage to the named point of destination, but risk passes when the goods are handed
over to the first carrier.
CIP – Carriage Paid To: the general/containerized/ multi equivalent of CFR. The seller pays
for carriage and insurance to the named destination point, but risk passes when the goods are
handed over to the first carrier.
DAF – Delivered At Frontier: the seller makers the goods available, cleared for export, at the
named place on the frontier. Suitable for rail/ road transport.
DES – Delivered Ex ship: the seller makes the goods available to the buyer on board the ship
at the port of destination, un-cleared for import.
DEQ – Delivered Ex quay: one step further than DES – the goods must be unloaded into the
quay at the port of destination.
DDU – Delivered Duty Unpaid: the seller must deliver the goods all the way to a named
place in the country in the country of destination. However, the buyer must clear the goods
for import and pay the necessary duties.
DDP – Delivered Duty Paid: maximum obligation for the seller – seller pays for costs,
charges, and official formalities up to destination.

6.7.2 Forms of payment

The four basic forms of payment arrangement are practiced in international marketing.

Letter of credit: Worldwide, letters of credit are very important mode of payment. The letter of
credit is an undertaking by a bank, so the seller can look to the bank for payment instead of
relying on the ability of willingness of buyers to pay. Letters of credit shift the buyer’s credit risk
to the bank issuing the letter of credit. When a letter of credit is employed the seller ordinarily
can draw a draft against the bank issuing the letter of credit and receive payments by presenting
proper shipping documents. Except for cash in advance letters of credit afford the greatest degree
of protection for the seller. The Procedure for a letter of credit begins with completion of the
contract when the buyer goes to a local bank and arranges for the issuance of a letter of credit,
the buyer’s bank then notify its correspondent bank in seller’s country that the letter has been
issued. After meeting the requirements set forth in the letter of credit the seller can draw a draft
against the credit (in effect, the bank issuing the letter) for payment of the goods. The precise
conditions of the letter of credit require presentation of certain documents with the draft before
the correspondent bank will honor it.
Bills of exchange: - A bill of exchange is defined as an unconditional order in writing, addressed
by one person to another signed by the person giving it requiring the person to whom it is
addressed to pay on demand or at a fixed or determinable future time, a certain sum in money to,
or to the order of a specified person or the bearer. The exporter draws a bill of exchange on an
overseas buyer or third party as designated in the export contract for the sum agreed. When the
customer signs it, it becomes accepted and this means that the customer has accepted the terms
and agreed to pay by the date designated in the document. In letters of credit, the credit of one or
more bank is involved and the seller risk is reduced considerably but in the use of bills of
exchange the seller assumes all risk until the actual payment is received. Bills of exchange have
one of three time periods- sight, arrival or date. A sight draft requires acceptance and payment on
presentation of the draft and often before arrival of the goods. An arrival draft requires payment
be made on arrival of goods. Unlike the other two, a date draft has an exact date of payment and
in no way is affected by the movement of good. There may be time designations placed on sight
and arrival drafts stipulating a fixed number of days after acceptance when the obligation must
be paid usually this period is 30 to 120 days, thus providing a means of extending credit to the
foreign buyer. For exporters a sight bill would be preferred to a time bill, as it would delay
payment once the goods had already been delivered.

Cash payment in advance: In this system payment may be either cash with order (CWO) or
cash on delivery (COD), but the volume of business handled on this basis is not large. Cash
places unpopular burden on the customer and typically is used where buyer is unknown or
known to be unstable and there is little likelihood of further orders being requested and being
paid for. It is also used when exchange restrictions within the country of destination are such that
the return of funds from abroad may be delayed for an unreasonable period. Usually, when the
character of the merchandise is such that an incomplete contract can result in heavy loss-like
complicated machinery or equipment manufactured to specification or special design would
necessitate advance payment which would be in fact a non refundable deposit.

Open account: Sales on open accounts are not generally made in foreign trade except to
customers of long standing with excellent credit reputations or to a subsidiary or branch of the
exporter. As this is based purely on trust, it offers the least security to the exporter. It saves
money and procedural difficulties but increases risk. It is popular within EU. Goods are sent to
an overseas buyer who has agreed to pay within certain period after the invoice date, usually not
more than 180 days. It is generally recommended that sales on open account not be made, when
it is the practice of the trade to use some other method, when special merchandise is ordered,
when shipping is hazardous, when the country of the importer imposes difficult exchange
restrictions or when political unrest requires additional caution.

6.8 Export Documents and Shipment

Each export shipment requires various documents to satisfy government regulations controlling
exporting as well as to meet requirements for international commercial payment transactions.
The most frequently required documents are export declarations, consular invoices or certificates
of origin, bill of lading commercial invoices, and insurance certificates. In addition documents
such as import licenses, export licenses, packing lists and inspection certificates for agricultural
products are often necessary.
These documents are prepared by exporters or their freight forwarders so that the shipment may
pass through customs, be loaded on the carries and sent to its destination.

A single shipment may require over 50 documents and can involve as many as 28 different
parties and government agencies. Generally preparation of documents can be handled routinely
but incomplete or improperly prepared documents lead to delay in shipment.In some countries
penalties fines or even confiscation of goods result from errors in some of these documents.
Principal export documents are as follows: -

Export Declaration: - To maintain a statistical measure of the quantity of goods shipped abroad
and to provide a means of determining whether regulations are being met, most countries require
shipment abroad to be accompanied by an export declaration. Usually, such a declaration
presented at the port of exit includes the names and addresses of the principals involved, the
destination of the goods a full description of the goods and their declared value.

Bill of Lading: The bill of lading is the most important document required to establish legal
ownership and facilitate financial transactions. It serves the following purposes (1) as a contract
for shipment between the carrier and shipper (2) as a receipt from the carrier for shipment (3) as
a certificate of ownership or title to the goods. Bills of lading are issued in the form of straight
bills, which are non-negotiable and are delivered to a consignee. It may be explained in a way
that only the person stipulated in it may obtain the merchandise on arrival. Order bills of lading
are negotiable and can be endorsed like a check. Bills of lading frequently are referred to as
being either clean or foul. A clean bill of lading means the items presented to the carrier for
shipment were properly packaged and clear of apparent damage when received: a foul bill of
lading means the shipment was received in damaged condition and the damage is noted on the
bill of lading.

Commercial Invoice: Every international transaction requires a commercial invoice.

Commercial invoice is a bill for good sold stating basic information about the transaction
merchandise description, cost of goods shipper and seller addresses and delivery and payment
terms. Commercial invoice for exports are similar to domestic invoices but include additional
information such as the origin of goods, export packing marks and a clause stating not to divert
goods elsewhere it is one of the financial documents required in international commercial
payments.

Insurance policy or certificate: Insurance certificate is evidence that insurance has been
obtained to cover stipulated risks, during transit. The risks of shipment due to political or
economic unrest in some countries and the possibility of damage from sea and weather make it
absolutely necessary to have adequate insurance covering loss due to damage, war or riots.
Typically the method of payment or terms of sale require insurance on the goods so very few
export shipments remain uninsured. The insurance policy or certificate of insurance is considered
a key document in export trade.
Export/Import Licenses: In many countries for exporting/importing goods the exporter/
importer require license. Export license is a government document that permits the exporter to
export designated goods to certain destinations. Export licenses are of two kinds, they are general
export license and validate export license. General export license is any export license covering
export commodities for which a validated export license is not required. It requires no formal
application. Most products can be exported under the general export license for which no special
authorization is necessary. Validated export license is a required document issued by the
government authorizing the export of specified commodities validated export license is a special
authorization for a specific shipment and it is issued only on formal application. In those cases
where import licenses are required by the country of entry a copy of the license or license
number is usually required to obtain a consular invoice.

Certificate of product origin: Certificate of product origin confirms that the goods being
shipped were produced in the exporting country. The importing country may require this so that
it can assess tariffs and enforce quotas. Local chamber of commerce commonly issues this
document.
Inspection Certificates: Inspection certificates may be needed to provide assurance that the
products have been inspected and that they confirm to relevant standards like absence of disease
and pests. Buyers of agricultural products, grain, foodstuffs and live animals frequently require
inspection certificates, before a country allows goods to enter its borders. For example imported
foodstuffs must often meet rigorous standards regarding pesticides, cleanliness, sanitation and
storage