Chapter 16
International Pricing Strategy
LEARNING OBJECTIVES
After studying this chapter students should be able to:
• Identify pricing-related internal challenges facing international firms.
CHAPTER SPOTLIGHTS
• Pricing Decisions and Internal Challenges of Multinational Firms: Pricing
decisions are affected by internal factors, such as location of production facilities
and ability to keep track of and control costs within the company.
CHAPTER OVERVIEW
The chapter addresses pricing-related challenges facing the international firm. These
challenges can be internal – company-related – and external – imposed by competitive
activities and by the political, legal, and economic environments. International pricing
decisions of international firms are then described.
CHAPTER OUTLINE
16-1 Pricing Decisions and Procedures
16-1a Production Facilities:
The location of production facilities determines the extent to which a company
16-1b Ability to Keep Track of Costs:
16-2 Environment-Related Challenges and Pricing Decisions
16-2a The Competitive Environment:
1) Competition: International and local competition can create serious problems
for the international firm. Competition can lower prices by manufacturing in a
low-labor-cost country. In addition, local competitors can offer legal copycat
16-2b The Political and Legal Environment: National governments interfere in the
pricing strategies of multinational firms by imposing regulations and restrictions;
they also use numerous strategies to restrict the repatriation of profits and to tax
and/or encourage the reinvestment of profits. Local governments have the right to
set high tariffs on imports that challenge emerging local producers, as stated in
the infant-industry argument.
1) Transfer Pricing: A pricing strategy used in intra-firm sales for commercial
transactions between units of the same corporation, within or beyond the
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16-2c The Economic and Financial Environment:
1) Inflationary Pressures on Price: Inflationary environment places strong
pressures on companies to lower prices. Often, pricing competitively, a
3) Shortage of Hard Currency and Countertrade: Low-income countries face a
significant shortage of hard currency reserves. Hard currency is currency
accepted for payment by any international seller. Alternatively, soft currencies
are currencies kept at a high artificial exchange rate and controlled by the
national government. Often, in order to be able to participate in international
trade, low-income countries resort to countertrade. Countertrade involves
selling a product to a buyer and agreeing to accept products from the buyer’s
firm in return for payment. A typical countertrade exchange today would
involve a seller from a high-income, industrialized country and a buyer from a
low-income country where hard currency is scarce and tightly controlled by
national institutions.
a) Position of the U.S. Government on Countertrade: The United States is
against government-mandated countertrade.
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iii. Compensation: Involves payment for goods in products and in
cash, usually in an agreed-upon currency.
iv. Counterpurchase (also known as parallel barter): Two exchanges
16-3 International Pricing Decisions
16-3a Price Setting:
Setting prices is often based on experience and intuition. The skill lies in
assessing differences in consumers’ willingness to pay. Currency fluctuations are
important determinants of the final price of items. Additionally, prices paid down
the chain of distribution in business-to-business transactions are also important.
1) Prices Higher in the Home Market:
Setting prices higher in the home market than in the international market
16-3b Aggressive Export Pricing:
Pricing method used by multinational corporations in order to gain market share
16-3c Standardized Pricing Versus Local Pricing:
Companies can choose from a number of strategies. Among them are local
16-3d Penetration Pricing and Skimming Strategies:
Penetration pricing involves pricing the product at first below the price of
KEY TERMS
Aggressive Export Pricing: A pricing strategy that prices products below market price
in order to penetrate new markets.
Clearing Account: A complex form of countertrade whereby countries trade products up
to a certain amount stated in a particular, mutually-agreed-upon hard currency and within
a given time frame, and, when an imbalance occurs and one country owes money to the
other, swing credits are paid in an agreed-upon hard currency, known as the clearing
currency; also called a clearing agreement.
Counterpurchase: A form of trade that involves two exchanges paid for in cash; it
involves two parallel contracts whereby the seller agrees to purchase products that are
usually unrelated to its business from the buyer and sell them on international markets;
also called parallel barter.
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Countertrade: A form of trade whereby a company sells a product to a buyer and agrees
to accept, in return for payment, products from the buyer’s firm or from the trade
agency/institution of the buyer.
Gray Market: A distribution system not authorized by the manufacturer whereby the
products purchased in a low-price market are diverted to other markets; also called
parallel imports.
Hard Currency: Currency that is accepted for payment by any international seller.
Incoterms (International Commercial Terms): Terms of sale used in transactions.
Infant-Industry Argument: A protectionist strategy aimed at protecting a national
industry in its infancy from powerful international competitors.
Offset Purchase: A large, hard-currency purchase, such as the purchase of defense
equipment, airplanes, telecommunication networks, railway or road building and other
expensive civil engineering projects whereby the seller agrees, in return to purchase
products that are valued at a certain percentage of the sales.
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Parallel Imports: A distribution system not authorized by the manufacturer whereby the
products purchased in a low-price market are diverted to other markets, also called gray
market.
Soft Currency: Currency that is kept at a high artificial exchange rate, overvalued, and
controlled by the national central bank.
Standardized Pricing: A pricing strategy in which the same price is charged for a
product regardless of local market conditions.
DISCUSSION QUESTIONS
1) What are gray markets? How do distributors using parallel imports affect a
multinational firm’s operations in the target market?
A gray market is a distribution system that is not authorized by the manufacturer,
2) What is dumping? Why do international companies use dumping strategies in
select target markets?
Dumping is the selling of products below cost to get rid of excess inventory or to
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3) Countertrade helps a company do business in markets that otherwise would be
inaccessible. What are the different approaches to countertrade that a
manufacturer of telecommunications equipment could use in order to penetrate
such markets?
A manufacturer of telecommunications equipment may offer turn-key options, whereby
4) What are the different motivations behind a company setting prices higher or
lower in the home country?
A firm may decide to set the price higher in the home country for several reasons,
such as a lower labor or raw material cost in the international market or strong local
REVIEW QUESTIONS
True/False
1. True
Multiple Choice
1. C
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Case 16-1
Travel Turkey: Pricing Decisions in a Changing Environment
1. Are there any legal or ethical concerns that might preclude Travel Turkey to
charge different prices to different travel agents for the same room? Is it
ethical or legal to charge different prices based on the home country of the
tour operators and their respective tourists?
If differences in price do not reflect difference in costs in Turkey, this is not a legal
2. What can Erdogan do if the dollar continues to fall relative to the Euro?
Erdogan probably has to increase prices in dollars or require higher prices from U.S. tour
3. How can Travel Turkey ensure against foreign exchange risk and maintain
its Eastern European and U.S. clients?
Travel Turkey can ensure against foreign exchange risk by diversifying its target market,
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