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GLOBAL PRICING: THREE POLICY ALTERNATIVES
√ (Learning Objective #5)
There are three alternative positions a company can take on worldwide pricing.
Extension or Ethnocentric
The first can be called an extension or ethnocentric pricing policy. An extension or
ethnocentric pricing policy calls for the per-unit price of an item to be the same no matter
where in the world the buyer is located.
In such instances, the importer must absorb freight and import duties.
The extension approach has the advantage of extreme simplicity because no information on
competitive or market conditions is required for implementation.
The disadvantage of the ethnocentric approach is that it does not respond to the competitive and
market conditions of each national market and therefore, does not maximize the company’s
profits in each national market or globally.
Adaptation or Polycentric
The second policy, adaptation or polycentric pricing, permits subsidiary or affiliate managers
or independent distributors to establish whatever price they feel is most appropriate in their
market environment.
There is no requirement that prices be coordinated from one country to the next.
IKEA takes a polycentric approach to pricing.
One recent study of European industrial exporters found that companies utilizing independent
distributors were the most likely to utilize polycentric pricing.
Such an approach is sensitive to local market conditions; however, valuable knowledge and
experience within the corporate system concerning effective pricing strategies are not brought to
bear on each local pricing decision.
Arbitrage is also a potential problem with the polycentric approach; when disparities in prices
between different country markets exceed the transportation and duty costs separating the
markets.
Geocentric
The third approach, geocentric pricing, is more dynamic and proactive than the other two. A
company using geocentric pricing neither fixes a single price worldwide, nor allows
subsidiaries or local distributors to make independent pricing decisions. Instead, the geocentric
approach represents an intermediate course of action.
Geocentric pricing is based on the realization that unique local market factors should be
recognized in arriving at pricing decisions. These factors include local costs, income levels,
competition, and the local marketing strategy. Price must also be integrated with other elements
of the marketing program.
The geocentric approach recognizes that price coordination from headquarters is necessary in
dealing with international accounts and product arbitrage. The geocentric approach also
consciously and systematically seeks to ensure that accumulated national pricing experience is
leveraged and applied wherever relevant.
Local costs plus a return on invested capital and personnel fix the price floor for the long term.
For consumer products, local income levels are critical in the pricing decision.
GRAY MARKET GOODS
√ (Learning Objective #6)
Gray market goods are trademarked products that are exported from one country to another
where they are sold by unauthorized persons or organizations.
Parallel importing occurs when companies employ a polycentric, multinational pricing policy
that calls for setting different prices in different country markets.
Gray markets can flourish when a product is in short supply, when producers employ skimming
strategies in certain markets, or when the goods are subject to substantial markups.
Gray markets impose several costs or consequences on global marketers. These include:
Dilution of exclusivity. Authorized dealers are no longer the sole distributors.
Free riding. If the manufacturer ignores complaints from authorized channel members,
those members may engage in free riding. That is, they may opt to take various actions to
offset downward pressure on margins.
Damage to channel relationships. Competition from gray market products can lead to
channel conflict as authorized distributors attempt to cut costs, complain to
manufacturers, and file lawsuits against the gray marketers.
Undermining segmented pricing schemes. A variety of forces—including falling trade
barriers, the information explosion on the Internet, and modern distribution capabilities—
hamper a company’s ability to pursue local pricing strategies.
Reputation and legal liability. Even though gray market goods carry the same trademarks
as goods sold through authorized channels, they may differ in quality, ingredients, or
some other way.
Companies should develop proactive strategic responses to gray markets.
DUMPING
√ (Learning Objective #7)
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 normally 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.
The U.S. Congress has defined dumping as an unfair trade practice that results in “injury,
destruction, or prevention of the establishment of American industry.”
In 2000, the U.S. Congress passed the so-called Byrd Amendment; this law calls for
antidumping revenues to be paid to U.S. companies harmed by imported goods sold at below-
market prices
In Europe, antidumping policy is administered by the European Commission; a simple majority
vote by the Council of Ministers is required before duties can be imposed on dumped goods.
For positive proof that dumping has occurred in the United States, both price discrimination and
injury must be demonstrated.
Price discrimination is the practice of setting different prices when selling the same quantity of
“like-quality” goods to different buyers.
PRICE FIXING
√ (Learning Objective #8)
In most instances, it is illegal for representatives of two or more companies to secretly set similar
prices for their products. Price fixing is generally held to be an anticompetitive act.
In horizontal price fixing, competitors within an industry that make and market the same
product conspire to keep prices high.
Vertical price fixing occurs when a manufacturer conspires with wholesalers or retailers (i.e.,
channel members at different “levels” from the manufacturer) to ensure certain retail prices are
maintained.
TRANSFER PRICING
√ (Learning Objective #9)
Transfer pricing refers to the pricing of goods, services, and intangible property bought and
sold by operating units or divisions of the same company.
Transfer pricing concerns intracorporate exchanges, which are transactions between buyers and
sellers that have the same corporate parent. For example, Toyota subsidiaries both sell to, and
buy from, each other.
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.
Tax authorities take a keen interest in transfer pricing policies.
Three major alternative approaches can be applied to transfer pricing decisions:
1. A market-based transfer price is derived from the price required to be competitive in
the global marketplace.
2. Cost-based transfer pricing uses an internal cost as the starting point in determining
price. Cost-based transfer pricing can take the same forms as the cost-based pricing
methods discussed earlier in the chapter.
3. Negotiated transfer price occurs when the organization’s affiliates determine the prices
among themselves. This method may be employed when market prices are subject the
frequent changes. (Table 11-3)
Tax Regulations and Transfer Prices
Because global companies conduct business in world characterized by different corporate tax
rates, there is an incentive to maximize income in countries with the lowest tax rates and to
minimize income in high-tax countries.
In recent years, many governments have tried to maximize national tax revenues by examining
company returns and mandating reallocation of income and expenses.
Sales of Tangible and Intangible Property
Each country has its own set of laws and regulations for dealing with controlled intracompany
transfers.
Whatever the pricing rationale, executives and managers involved in global pricing policy
decisions must familiarize themselves with the laws and regulations in the applicable countries.
COUNTERTRADE
√ (Learning Objective #10)
In recent years, many exporters have been forced to finance international transactions by taking
full or partial payments in some form other than money. A number of alternative finance
methods, known as countertrade, are widely used.
In a countertrade transaction, a sale results in product flowing in one direction to a buyer; a
separate stream of products and services, often flowing in the opposite direction, is also created.
Countertrade generally involves a seller from the West and a buyer in a developing country.
Countertrade flourishes when hard currency is scarce. Exchange controls may prevent a
company from expatriating earnings; the company may be forced to spend money in-country for
products that are then exported and sold in third-country markets.
Historically, the single most important driving force behind the proliferation of countertrade was
the decreasing ability of developing countries to finance imports through bank loans.
Generally, several conditions affect the probability that some form of countertrade will be used:
The priority attached to the import. The higher the priority, the less likely it is that
countertrade will be required.
The value of the transaction. The higher the value, the greater the likelihood that
countertrade will be involved.
The availability of products from other suppliers. If a company is the sole supplier of a
differentiated product, it can demand monetary payment.
Barter
The term barter describes the least complex and oldest form of bilateral, non-monetized
countertrade.
Simple barter is a direct exchange of goods or services between two parties. Although no money
is involved, both partners construct an approximate shadow price for products flowing in each
direction.
Counterpurchase
The counterpurchase form of countertrade, also termed parallel trading or parallel barter, is
distinguished from other forms in that each delivery in an exchange is paid for in cash.
Offset
Offset is a reciprocal arrangement whereby the government in the importing country seeks to
recover large sums of hard currency spent on expensive purchases such as military aircraft or
telecommunications systems.
Distinguishing characteristics between offset and counterpurchase:
Counterpurchase is characterized by smaller deals over shorter periods of time.
Offset is not contractual but reflects a memorandum of understanding that sets out the
dollar value of products to be offset and the time period for completing the transaction.
Offsets have become a controversial facet of today’s trade environments.
Compensation Trading
Compensation trading, also called buyback, is a form of countertrade that involves two
separate and parallel contracts.
In one contract, the supplier agrees to build a plant or provide plant equipment, patents or
licenses, or technical, managerial, or distribution expertise for a hard currency down payment at
the time of delivery.
In the other contract, the supplier company agrees to take payment in the form of the plant’s
output equal to its investment (minus interest) for a period of as many as 20 years.
Essentially, the success of compensation trading rests on the willingness of each firm to be both a
buyer and a seller.
Switch Trading
Also called triangular trade and swap, switch trading is a mechanism that can be applied to
barter or countertrade. In this arrangement, a third party steps into a simple barter or other
countertrade arrangement when one of the parties is not willing to accept all the goods received
in a transaction.
The third party may be a professional switch trader, switch trading house, or a bank.
The switching mechanism provides a "secondary market" for countertraded or bartered goods
and reduces the inflexibility inherent in barter and countertrade.
TEACHING TOOLS AND EXERCISES
Activity: Students should be preparing or presenting their Cultural-Economic Analysis and
Marketing Plan for their country and product as outlined in Chapter 1.
Out-of-Class Reading: Nagle, Thomas T. and Reed Holden. The Strategy and Tactics of
Pricing: A Guide to Profitable Decision Making 3/e. Upper Saddle River, New Jersey: Prentice
Hall, 2002.
Internet Exercise: Look up prices for some upscale watch brands (like Movado, Tag Heur, or
Rolex) from traditional U.S.-based merchants like Macy’s or Saks Fifth Avenue. Then go to
www.alibaba.com and checkout the prices for these “similar” products. What are the price
differentials? Is the “price” for the genuine article worth the “difference” for the knockoffs?
Go to www.overstock.com and check out the prices of these similar products through the “grey
market. Again, is the price differential worth the monetary difference? Explain your rationale.
Guest Speaker: Invite a local service provider (attorney, shopkeeper) and asked them to speak
to the class about how they “price” there particular service. Compare and contrast “how” they
price from the descriptions and strategies outlined in this chapter.
SUGGESTED READING
Books
Abadallah, Wagdy M. International Transfer Pricing Policies: Decision Making Guidelines for
Multinational Companies. New York: Quorum Books, 1989.
Alexandrides, C. G. and B. L. Bowers. Countertrade: Practices, Strategies, and Tactics. New
York: Wiley, 1987.
Kashani, Kamran. Managing Global Marketing. Boston: PWS-Kent, 1992.
Nagle, Thomas T. and Reed Holden. The Strategy and Tactics of Pricing: A Guide to Profitable
Decision Making 3/e. Upper Saddle River, New Jersey: Prentice Hall, 2002.
Schaffer, Matt.Winning the Countertrade War: New Export Strategies for America. New York:
John Wiley & Sons, 1989.
Articles
Assmus, Gert, and Carsten Wiese. “How to Address the Gray Market Threat Using Price
Coordination.” Sloan Management Review 36 (Spring 1995), pp. 31-41.
Bateman, Connie Rae, Neil C. Herndon, Jr., and John P. Fraedrich. “The Transfer Pricing
Decision Process for Multinational Corporations.” International Journal of Commerce
and Management 7, no. 3 & 4 (1997), pp. 18-38.
Bernstein, Jerry, and David Macias. “Engineering New-Product Success – The New-Product
Pricing Process at Emerson.” Industrial Marketing Management 31, no. 1 (January
2002), pp. 51-64.
Brooke, James. “Brazil Looks North from Trade Zone in Amazon.” New York Times (August 1,
1995), p. D2.
Burns, Paul. “U.S. Transfer Pricing Developments.” International Tax Review 13, no. 4 (2003),
48-49.
Butscher, Stephen A. “Maximizing Profits in Euroland.” Journal of Commerce (May 5, 1999), p.
5.
Cavusgil S. Tamer. “Pricing for Global Markets.” Columbia Journal of World Business 31, No. 4
(Winter 1996), pp. 66-78.
Cohen, Stephen S. and John Zysman. “Countertrade, Offsets, Barter and Buyouts.” California
Management Review 28, no. 2 (1986), pp. 41-55.
Choi, Chong Ju, Soo Hee Lee, and Jai Boem Kim. “A Note on Countertrade: Contractual
Uncertainty and Transaction Governance in Emerging Economies.” Journal of
International Business Studies 30, no. 1 (1999) pp. 189-201.
Cooper, Robin, and W. Bruce Chew. “Control Tomorrow’s Costs Through Today’s Designs.”
Harvard Business Review 74, no. 1 (January-February 1996), pp. 89-97.
Kostecki, Michel M. “Marketing Strategies Between Dumping and Anti-Dumping Action.”
European Journal of Marketing 25, no. 12 (1992), pp. 7-19.
Lasagni, Andrea. “Does Country-targeted Anti-dumping Policy by the EU Create Trade
Diversion?” Journal of World Trade 34, no. 4 (August 2000), pp. 137-59.
Lindsay, Brink. “The U.S. Antidumping Law: Rhetoric Versus Reality.” Journal of World Trade
34, no. 1 (February 2000), pp. 1-38.pp. 1-38.
Mehafdi, Messaoud. “The Ethics of International Transfer Pricing.” Journal of Business Ethics
28, no. 4 (December 2000) pp. 365-381.
Mirus, Rolf and Bernard Yeung. “Why Countertrade? An Economic Perspective.” The
International Trade Journal 7, no. 4 (1993), pp. 409-433.
Prince, Melvin, and Mark Davies. “Seeing Red Over International Gray Markets.” Business
Horizons 43, no. 2 (March-April 2000), pp. 71-74.
Qureshi, Asif H. “Drafting Anti-Dumping Legislation: Issues and Tips.” Journal of World Trade
34, no. 6 (December 2000) pp. 19-32.
Shoham, Aviv, and Dorothy A. Paun. “A Study of International Modes of Entry and Orientation
Strategies Used in Countertrade Transactions.” Journal of Global Marketing 11, no. 3
(1998), pp. 5-19.
Simon, Hermann. “Pricing Opportunities - And How to Exploit Them.” Sloan Management
Review 33, no. 2 (Winter 1992), pp. 55-65.
Sinclair, Stuart. “A Guide to Global Pricing.” Journal of Business Strategy 14, no. 3 (May-June
1993), pp. 16-19.
Stöttinger, Barbara. “Strategic Export Pricing: A Long and Winding Road.” Journal of
International Marketing 9, no. 1 (2001), pp. 40-63.
Tomlinson, Richard. “Who’s Afraid of Wal-Mart?” Fortune (November 7, 1988), pp. 147-154.
