 The law of one price states that identical products

should be priced identically in different markets,

once the price is converted to the same currency
in each market.

 Textiles may be relatively less expensive, while

electronic goods may be relatively more
expensive.


 These differences are contrary to the law of one

price.
 The Big Mac Index compares the price of the Big Mac
(or a comparable sandwich) in all of McDonald’s
markets.

 The price of the burger should be relatively the same,

but isn’t always.

 Price differences may be due to different costs for the

various components of the burger, unequal labor costs,
increased or decreased demand for the sandwich, cost
of transportation of goods, consumer psychology
within a country, or governmental activities,
particularly taxes on imports.
SLIDE 4- what is the product in question, with significant price differences?
SLIDE 5
SLIDE 6 Retail Price Comparison across Cities
SLIDE 7 Selling Prices of Antidepressants
Slide 8 -Price Variances across Global Markets
New York London Paris Tokyo Mexico City

Aspirin $ 0.99 $ 1.23 $ 7.08 $ 6.53 $ 1.78

Cup of coffee 1.25 1.50 2.10 2.80 0.91
Movie 7.50 10.50 7.89 17.29 4.55
Compact disk 12.99 14.99 23.16 22.09 13.91
Levi 501 jeans 39.99 74.92 75.40 79.73 54.54
Ray-Ban sunglasses 45.00 88.50 81.23 134.49 89.39
Sony Walkman 59.95 74.98 86.00 211.34 110.00
Nike Air Jordan 125.00 134.99 157.71 172.91 154.24
Gucci men's loafers 275.00 292.50 271.99 605.19 157.27
Nikon camera 629.95 840.00 691.00 768.49 1,054.42
 Harley Davidson CVO Road Guide Ultra

Starts at $40,000 in the U.S

Limited Edition in India cost around $80,000!

Chapter 18 Global Pricing Issues
 Pricing strategy forms another cornerstone of a global marketing

 Price is the only marketing mix element that generates revenues. All other
elements entail costs

 Manager’s fiduciary responsibility is to market products at a profit

 A company’s global pricing policy may make or break its overseas

expansion efforts (exchange complications)

 Significant challenges in coordinating (adapting or standardizing) global

pricing strategies
Global Pricing - Overview
Prices Differ Across World Markets
There are many Drivers of Foreign Market Pricing
Parallel Distribution and Grey Markets
Managing Price Escalation
Full-Cost versus Variable-Cost Pricing
Dumping as a Price Strategy in World Markets
Role and Growth in Countertrading
The Effective Use of Transfer Pricing
Popularity of Leasing Strategy in Developing Markets
Use of Purchasing Power Parity Index in Price Setting
Parallel Importation or Gray Markets
 Firms may have to charge different prices from country to
country

 In international marketing, this causes a vexing problem:

Parallel Importation or Gray Markets

 Parallel imports develop when importers buy products from

distributors in one country and sell them in another to
“unauthorized” (legal) distributors

 Parallel market occurs whenever price differences are greater

than cost of transportation between markets
 Parallel Importation or Gray Markets

 For example, the ulcer drug Losec sells for only $18 in
Spain but goes for $39 in Germany; and the heart drug
Plavix costs $55 in France and sells for $79 in London

 Thus, it is possible for an intermediary to buy products

in countries where it is less expensive and divert it to
countries where the price is higher and make a profit
 Effects of Parallel Importation

 Customers who unknowingly buy unauthorized imports

have no assurance of the quality of the item they buy, of
warranty support, or of authorized service or
replacement parts

 Companies can restrict the gray market by policing

distribution channels
 Approaches to International Pricing
 Full-Cost Pricing: no unit of a similar product is different
from any other unit in terms of cost, which must bear its
full share of the total fixed and variable cost.
 Prices are often set on a cost-plus basis, i.e., total costs plus a
profit margin.
 Variable-Cost Pricing: firms regard foreign sales as bonus
sales and assume that any return over their variable cost
makes a contribution to net profit.
 This is a practical approach to pricing when a company has
high fixed costs and unused production capacity
Global Pricing and Antidumping Law
 Dumping occurs when imports are sold at an
“unfair” price.
 Voluntary Export Restraint (VER)

 To minimize risk exposure to antidumping actions,

exporters might pursue any of the following

marketing strategies:
 Trading up
 Service enhancement
 Distribution and communication
 Price Escalation

 Price escalation refers to the added costs incurred as a

result of exporting products from one country to
another.
 There are several factors that lead to higher prices:

 Costs of Exporting: the term relates to situations in

which ultimate prices are raised by shipping costs,

insurance, packing, tariffs, longer channels of
distribution, larger middlemen margins, special taxes,
administrative costs, and exchange rate fluctuations
 Price Escalation
 Taxes, Tariffs, and Administrative Costs: These
costs results in higher prices, which are generally
passed on to the buyer of the product.

 Inflation: Inflation causes consumer prices to

escalate and the consumer is faced with rising
prices that eventually exclude many consumers
from the market
Price Escalation
 Middleman and Transportation Costs: Longer
channel length, performance of marketing
functions and higher margins may make it
necessary to increase prices.
 Exchange Rate Fluctuations and Varying

Currency Values: Currency values swing vis-à-

vis other currencies on a daily basis, which may
make it necessary to increase prices.
Approaches to International Pricing
 Skimming Pricing:  This is used to reach a
segment of the market that is relatively price
insensitive and thus willing to pay a premium
price for a product.
 Penetration Pricing: This is used to stimulate

market growth and capture market share by

deliberately offering products at low prices.
 Approaches to Lessening Price Escalation

 Lowering Cost of Goods: Firms can lower costs by

eliminating costly features in products or by
manufacturing products in countries where labor costs
are cheaper
 Lowering Tariffs: Firms can lower prices by

categorizing products in classifications where the

tariffs are lower
 Lowering Distribution Costs: Firms can design

channels that are shorter, have fewer middlemen, and

by reducing or eliminating middleman markup
 Leasing in International Markets
 Leasing opens the door to a large segment of
nominally financed foreign firms that can be sold
on a lease option but might be unable to buy for
cash.
 Leasing helps guarantee better maintenance and

service on overseas equipment.

 Equipment leased and in use helps to sell other

companies in that country.

40% of major deals involve offsetting
trades; firms like Boeing agree to help
foreign countries in many ways
Countertrade as a Pricing Tool
 Countertrade is a pricing tool that every international marketer
must be ready to employ
 There are many distinct transactions in counter trading:
 Barter: is the direct exchange of goods between two parties in
a transaction
 Counter-purchase or off-set trade: the seller agrees to sell a
product at a set price to a buyer and receives payment in cash
and goods from the buyer
 Buy-back: This type of agreement is made the seller agrees to
accept as partial payment a certain portion of the output that are
produced from the plant or machinery that are sold to the buyer
Proactive Countertrade Strategy
 Answering the following questions is suggested
before entering into a countertrade agreement:
 Is there a ready market for the goods bartered?
 Is the quality of the goods offered consistent
and acceptable?
 Is an expert needed to handle the negotiations?
 Is the contract price sufficient to cover the cost
of barter and net the desired revenue?
Transfer Pricing Strategy (internal pricing)
Prices of goods transferred from a company’s
operations in one country to its units elsewhere

 Sales at the cost of the most efficient producer in the

company plus a standard markup

 Sales at negotiated prices

 Arm’s-length sales using the same prices as quoted to

independent customers
Benefits of Transfer Pricing Strategy
 Lowering duty costs by shipping goods into high-tariff
countries at minimal transfer prices so that duty base and
duty are low.

 Reducing income taxes in high-tax countries by

overpricing goods transferred to units in such countries;
profits are eliminated and shifted to low-tax countries.

 Facilitating dividend repatriation when dividend

repatriation is curtailed by government policy by inflating
prices of goods transferred.
Hard vs. Soft Currency
Currency names & symbols for top 10 economies
Current Account Balances Globally