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Chapter 18 - Pricing for International Markets
18-1
Chapter 18 – Pricing for International Markets
Teaching Objectives
Basic pricing policy questions that arise from the special cost, market, and competitive factors in foreign
markets are the focus of this chapter. The additional costs of international marketing that lead to price
escalation and ways to minimize these costs and countertrades as a special pricing problem should all be
stressed. The teaching objectives are to:
1) Review pricing policies as they are affected by the differences in international marketing and
especially parallel imports.
2) Explore fully the problem of price escalation and ways to lessen price escalation.
3) Examine foreign trade zones as an important means of controlling and possibly lessening some of the
costs associated with price escalation.
4) Discuss countertrades as an important tool in international pricing and the importance of taking a
proactive countertrade strategy.
Comments and Suggestions
1. With the unification of the European Union, fluctuating exchange rates, the general globalization of
markets, and increasingly versatile technologies, parallel imports (gray markets) are a growing
problem. A discussion of this topic can be built around Crossing Borders 18-1.
2. When products are moved across borders, additional costs are incurred. Some can be attributed to the
extra cost of the physical movement of goods and others to tariffs and non-tariff barriers. Until that
time when there is truly free trade, international marketers will always be confronted with price
escalation. Greater profit and the ability to be more price competitive can be gained by the company
that controls, if not eliminate, many of the costs associated with price escalation. Exhibit 18-2,
Sample Causes and Effects of Price Escalation, is a hypothetical illustration of three different
situations of price escalation. As a side note, there have been many comments by business people on
this illustration and the unanimous response is that it is too conservative, i.e., the problem of price
escalation is often worse than illustrated.
3. Of the three ways of lessening price escalation, lowering tariffs either through reclassification or,
better yet, the elimination of a tariff often has the greatest impact. Also, lowering manufacturing costs
and distribution costs can be very effective if a company has had a tendency to overlook these costs.
Lessening Price Escalation, is a list of the different approaches that a company may use in lessening
prices escalation. A side note on marginal-cost pricing—a dumping charge is always lurking in the
background when using marginal-cost pricing.
4. Foreign trade zones can be very useful in helping a company lessen the costs of exporting and
importing. Achieving the benefits of the steps for lessening price escalation can be aided by
effectively using a FTZ. FTZs are not always available in all countries but in those where they are,
their use should be evaluated carefully.
5. Countertrading continues to be important in many of the growth markets today. It is important to
stress that companies need to include countertrading as one of its pricing tools and to be proactive
rather than reactive. Cash is always preferred but those companies that plan ahead for the possibility
of being asked to accept some form of countertrade in order to consummate a sale have the most
success with this pricing issue.
Lecture Outline
Chapter 18 - Pricing for International Markets
18-2
I. Global Perspective
II. Pricing Policy
A. Pricing Objectives
B. Parallel Imports
III. Approaches to International Pricing
A. Full-Cost versus Variable-Cost Pricing
B. Skimming versus Penetration Pricing
IV. Price Escalation
A. Costs of Exporting
1. Taxes
2. Tariffs and Administrative Costs
3. Inflation
4. Deflation
5. Exchange-Rate Fluctuations
6 Varying Currency Values
7. Middleman and Transportation Costs
B. Sample Effects of Price Escalation
C. Approaches to Lessening Price Escalation
1. Lower Cost of Goods
3. Lower Distribution Costs
D. Using Foreign-Trade Zones to Lessen Price Escalation
E. Dumping
V. Leasing in International Markets
VI. Countertrade as a Pricing Tool
A. Types of Countertrade
B. Problems of Countertrading
C. The Internet and Countertrade
D. Proactive Countertrade Strategy
VII. Transfer Pricing Strategy
VIII. Price Quotations
IX. Administered Pricing
A. Cartels
B. Government Influenced Pricing
X. Getting Paid
A. Letters of Credit
B. Bills of Exchange
C. Cash in Advance
D. Open Accounts
E. Forfaiting
Chapter 18 - Pricing for International Markets
18-3
Discussion Questions
1.
Define:
Dumping
Skimming
Countervailing duty
Countertrade
Parallel market
Gray Market
Variable-cost pricing
Penetration pricing
Price Escalation
Full-cost pricing
Exclusive distribution
Barter
Cartel
Forfaiting
Letter of Credit
Bills of Exchange
Administered pricing
2. Discuss the causes and solutions of parallel imports and their effect on price.
Parallel imports develop when importers buy products from distributors in one country and sell them
in another to distributors who are not part of the manufacturer’s regular distribution system. This
practice is lucrative when wide margins exist between prices for the same products in different
countries. There are a variety of conditions that can create the profitable opportunity for a parallel
Eastman Kodak prices its film higher in Japan than in other parts of Asia. Coca-Cola syrup imported
from Los Angeles is cheaper than that purchased through normal channels in Japan.
The possibility of parallel market occurs whenever price differences are greater than the cost of
transportation between two markets. In Europe, because of differing taxes and competitive price
structures, prices for the same product vary between countries. When this occurs, it is not unusual for
Chapter 18 - Pricing for International Markets
18-4
3. Why is it so difficult to control consumer prices when selling overseas?
4. Explain the concept of “price escalation” and tell why it can mislead an international marketer.
Price escalation is price increases due to added costs produced by such things as tariffs, taxes, longer
5. What are the causes of price escalation? Do they differ for exports and goods produced and sold in a
foreign country?
6. Why is it seldom feasible for a company to absorb the high cost of international transportation and
reduce the net price received?
7. Price escalation is a major pricing problem for the international marketer. How can this problem be
counteracted? Discuss.
Chapter 18 - Pricing for International Markets
18-5
The key to counteracting the problem of price escalation centers on any method that will reduce the
price of the product, tariffs, or any other cost in marketing the product. Some of the more frequently
8. Changing currency values have an impact on export strategies. Discuss.
In addition to the risks from exchange rate variations other risks result from changing values of a
country’s currency relative to other currencies. A strong dollar produces price resistance since it takes
a large quantity of local currency to buy a U.S. dollar. Conversely, when the U.S. dollar is weak,
9. “Regardless of the strategic factors involved and the company’s orientation to market pricing, every
price must be set with cost considerations in mind.” Discuss.
10. “Price fixing by business is not generally viewed as an acceptable procedure (at least in the domestic
market); but when governments enter the field of price administration, they presume to do it for the
general welfare to lessen the effects of `destructive’ competition.” Discuss.
11. Do value added taxes discriminate against imported goods?
Chapter 18 - Pricing for International Markets
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© 2020 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
Typically, value added taxes are applied within the country to all products. As a consequence, these
taxes do not directly discriminate against imported goods. However, imported goods frequently have
a higher cost due to tariffs and additional transportation costs and thus may have to pay higher value
added taxes. When compared with the lower amount charged to locally produced and nonimported
goods, the value added tax may increase the price to the point that the market will not buy the
product. However, relatively speaking, value added taxes do not discriminate against imported goods.
12. Explain specific tariffs, ad valorem tariffs, and combination tariffs.
13. Suggest an approach a marketer may follow in adjusting prices to accommodate exchange-rate
fluctuations.
14. Explain the effects of indirect competition and how it may be overcome.
Indirect competition is competition from goods which are substitutes for a certain product, but which
15. Why has dumping become such an issue in recent years?
16. Cartels seem to rise phoenix-like after they have been destroyed. Why are they so appealing to
business?
17. Discuss the different pricing problems that result from inflation versus deflation in a county.
Inflation causes consumer prices to escalate and the consumer is faced with ever rising prices
Chapter 18 - Pricing for International Markets
$1.09, a flat screen 32-inch color television down from $4000 to $2400
and clothing stores compete
to sell fleece jackets for $8, down from $25 two years earlier. Prices have dropped to a point that
consumer prices are similar to those they once found only on overseas shopping trips. The high
prices prevalent in Japan before deflation allowed substantial margins for everyone in the distribution
18. Discuss the various ways in which governments set prices. Why do they engage in such activities?
18-8
19. Why are costs so difficult to assess in marketing internationally?
20. Discuss the major problems facing a company that is countertrading.
The critical problems confronting the seller in a countertrade negotiation is having the expertise to
determine the value and the potential demand of the goods offered. Frequently, there is inadequate
Chapter 18 - Pricing for International Markets
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21. If a country you are trading with has a shortage of hard currency, how should you prepare to negotiate
price?
22. Of the four types of countertrade discussed in the text, which is the most beneficial to the seller?
23. Discuss how FTZ’s can be used to help reduce price escalation.
A common use for foreign trade zone or free trade zone is to reduce price escalation. A foreign trade
zone allows a marketer to store products in quantity for later distribution and forgo import taxes while
goods are within the FTZ. This obviously allows the marketer to save part of the cost of financing the
24. One free trade zone is in Turkey. Visit www.esbas.com.tr and discuss how it might be used to help
solve the price escalation problem of a product being exported from the U.S. to Turkey.
From the Website: An Export Processing Zone (EPZ) is an Industrial Park where most trade barriers,
Chapter 18 - Pricing for International Markets
Warehouses, Free Ports, Custom Zones, etc. The Aegean Free Zone is an EPZ that is also an
