Page 153 - DMGT547_INTERNATIONAL_MARKETING

International Marketing

Notes Reference prices have significant international implications. While marketers may choose to
introduce a product at a low price in order to induce trial, which is useful in a new market where
the penetration of a product is low, this may have serious repercussions as consumers may
develop a low reference price and may thus resist paying higher prices in the future.
Selected International Pricing Issues: In some cultures, particularly where retail stores are
smaller and the buyer has the opportunity to interact with the owner, bargaining may be more
common, and it may thus be more difficult for the manufacturer to influence retail level pricing.

Two phenomena may occur when products are sold in disparate markets. When a product is
exported, price escalation, whereby the product dramatically increases in price in the export
market, is likely to take place. This usually occurs because a longer distribution chain is necessary
and because smaller quantities sold through this route will usually not allow for economies of
scale. “Gray” markets occur when products are diverted from one market in which they are
cheaper to another one where prices are higher, e.g. Luis Vuitton bags were significantly more
expensive in Japan than in France, since the profit maximizing price in Japan was higher and
thus bags would be bought in France and shipped to Japan for resale. The manufacturer therefore
imposed quantity limits on buyers. Since these quantity limits were circumvented by enterprising
exchange students who were recruited to buy their quota on a daily basis, prices eventually had
to be lowered in Japan to make the practice of diversion unattractive. Where the local government
imposes price controls, a firm may find the market profitable to enter nevertheless since revenues
from the new market only have to cover marginal costs. However, products may then be
attractive to divert to countries without such controls.
Transfer pricing involves what one subsidiary will charge another for products or components
supplied for use in another country. Firms will often try to charge high prices to subsidiaries in
countries with high taxes so that the income earned there will be minimized.

Figure 8.1: Experience Curve costs of Production

Source: http://www.consumerpsychologist.com/intl_Price.html
Antitrust laws are relevant in pricing decisions, and anti-dumping regulations are especially
noteworthy. In general, it is illegal to sell a product below your cost of production, which may
make a penetration pricing entry strategy infeasible. Japan has actively lobbied the World
Trade Organization (WTO) to relax its regulations, which generally require firms to price no
lower than their average fully absorbed cost (which incorporates both variable and fixed costs).
Alternatives to “hard” currency deals: Buyers in some countries do not have ready access to
convertible currency, and governments will often try limiting firms’ ability to spend money
abroad. Thus, some firms have been forced into non-cash deals. In barter, the seller takes payment
in some product produced in the buying country.

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