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Unit 9: Terms of Payment and Delivery

Market-based Transfer Pricing Method: Under this method, the price is derived from the Notes
competitive foreign market price. It may therefore be too low for the selling subsidiary and the
production cost may not be covered. It may be fruitfully used to enter a new market which may
be too small to support local manufacturing. This method enables a company to establish its
name or franchise in the new market without undertaking production there.
Transfer at “Arm’s Length Price”: In this method, the transfer price is the price that unaffiliated
parties in a similar transaction agree on. The arm’s length price may be usefully applied if it is
viewed not as a single point price but rather a range of prices. In fact, pricing at arm’s length in
the case of differentiated products, results not in predeterminable specific prices but in prices
that fall within a predeterminable range. The problem with this method occurs when the product
has no external buyers or is sold at different prices in different markets.

Of all the four methods, the cost plus and the market based pricing are the most popular methods
used by companies in the case of inter firm transfer.

Self Assessment

State whether the following statements are true or false:

13. Different units under the same corporate body may be located in different foreign countries.
The pricing of exchanges of goods and services among them is known as transfer pricing.
14. Transfer at “Arm’s Length Price” approach is based on the assumption that lower costs
lead to better performance by the subsidiary/affiliate.

Task Give a practical illustration of “Transfer at Arms Length price”.

9.6 Grey Marketing

Intellectual property owners face an additional problem in preserving their property rights.
The problem is that, under some circumstances, legitimate goods will enter a market through
unauthorised channels. Such goods are known as grey market goods. Grey market goods appear
either because a seller has priced goods differently in different markets or because currency
values change, making it profitable to acquire goods in other markets and import them.

Example: If the value of the dollar is high against the German mark, it may make sense
to buy German cars directly from German sellers, rather than through the authorised American
distributors.
Grey market goods pose several problems for intellectual property owners. The primary problem
may be the disruption they cause to networks of authorised distributors and dealers, who feel
undercut by the lower priced goods. For consumers, the main problem with grey market goods
may be getting warranty service if something goes wrong with the goods. Warranty service is
sometimes only available from authorised dealers. In addition, in some cases, instructions and
safety information may not be in the language of the market in which the sale takes place.
The same laws that bar the import of counterfeit goods may also bar the import of some grey
market goods. Many legal systems are beginning to encounter grey market litigation. The
United States has struggled with the problem of grey market goods for 70 years. As discussed
earlier, by section 526 of the Tariff Act of 1930, the owner of a trade mark may exclude imports

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