Law of One Price would prevail in:

A truly global market

- Everything would cost the same everywhere

International trade helps keep prices _____________ and ___________ prices keep
inflation in check.
- Low

National markets reflect:

costs, regulation, demand, competition

The global manager must develop systems and policies that address:
- Price floors

- Price Ceilings

- Optimum Prices

.... All of these must be consistent with global opportunities and constraints

Price Floors:
government imposed limits on how low a price can be charged

Price Ceilings:
Are maximum prices set by the government for particular goods and services that
they believe are being sold at too high of a price and thus consumers need some
help purchasing them.

Managers must determine the objectives for the pricing objectives which might
include?
- Unit Sales

- Market share

- Return on Investment

.... They must then develop strategies to achieve those objectives

Pricing decisions are determined by:

- Location of production facilities

- and the companies' ability to track costs

Are production facilities important decision making factors in international

pricing strategy externally or internally?
Internally - within the firm's control

The location of production facilities determines the extent to which:

- companies can control costs and price their products competitively.

What are important aspects related to firms' production facilities?

- Factory capacity utilization

- Internal Costs structures

- And the market contribution rate

Firms with factories operating at full capacity are able to:
- spread fixed costs over more units, and thus have more flexibility in their
pricing strategies.

Internal Cost Structures could be:

- the advantages firms have over cost structures than others

Ex: production facilities in countries that have an abundance of cheap labor have
an advantage over firms with production facilities in countries that have no excess
labor.

Market Contribution rate is the:

Percentage of total firm profits from a particular product.

Why is the ability to keep track of costs so difficult for financial officers?
Product components often are manufactured in different countries, then final
products are assembled in a particular country, which is usually not the company's
home country, and then sold all of the world.

What has helped financial officers keep track of product costs?

Improvement in information technology and electronic data interchange systems (EDI)

What are the challenges in the international firm's environment that may effect the
firm's pricing decisions?
- Currency fluctuations

- Inflationary environment

- Government controls, subsidies, regulations

- Competitive behavior

- Sourcing

Currency Fluctuations:
increase and decrease in local currencies can make certain products unaffordable

Inflationary Environment:
- places strong pressures on companies to lower prices.

During inflationary periods, firms must often decide between:

- mainting a competitive presence in a market and weathering the downside of the
economic cycle

- or abandoning the market, which is a high-cost, high-risk proposition

What is the pricing issue with price inflations?

results in devaluation in local currencies which leads businesses to set prices in
a more stable hard currency and require payment in the respective currency, rather
than using the most recent exchange rate.

Countertrade:
Occurs when payment is made in some form other than money.

What are the types of policies and regulations that affect pricing decisions?
- Dumping legislation

- Resale price maintenance legislation

- Price ceilings

- General reviews of price levels

Transfer Pricing:
is a pricing strategy used in intra-firm sales; the pricing of products in the
process of conducting transactions between units of the same corporation that are
within or beyond the national borders of the parent company is known as transfer
pricing and regarded as a legitimate business opportunity by transnational
corporations.

Intra-corporate exchanges use:

- Cost based transfer pricing

- Market-based transfer pricing

- Negotiated transfer pricing

Market-based Transfer Pricing:

Pricing products at market level, instead of pricing products at cost, where the
price reflects the price products sell for in a particular market.

Cost-Based Transfer Pricing:

Pricing products at cost, where the cost reflects not the cost incurred by the
company, but the estimated opportunity cost of the product.

Negotiated Transfer Pricing:

products can be priced using a combination of a market-based transfer pricing
strategy and a cost-based transfer pricing strategy.

What are two competitive threats within the competitive environment?

1. Gray market/Parallel Imports

2. Dumping

What has been identified as a main cause of parallel importing?

Differential pricing (Price Discrimination)

Parallel Imports:
- diverting products purchased in a low-price market to other markets by means of a
distribution system not authorized by the manufacturer, known as gray markets.

Dumping:
WTO states that, if a company exports a product at a lower price than the price it
normally charges on its own home market, it is said to be "dumping" the product.

A typical example of dumping involves:

- A foreign company that enjoys high prices and high profits at home as a result of
trade barriers against imports. Company uses those profits to sell at much lower
prices in foreign market to build market share and suppress the profitability of
competitors with open home markets.

Price Fixing:
an agreement between two or more firms on the price they will charge for a product

- Two types: Vertical (across the chain) and horizontal

What are the 3 policy alternatives in global pricing?

1. Extension

2. Adaption: looking at local costs and income levels and adapting their price to
meet those needs

3. Geocentric: In between extension and adaption

What are the important determinants of the final price?

- Currency fluctuations

- Prices paid down the chain of distribution, in business-to-business transactions.

- terms of payment offered by the seller

What type of firms are likely to use penetration pricing?

Multinationals that have sales-based objectives, attempting to gain a high sales
volume.

Penetration Pricing:
- price the product at first below the price of competitors to quickly penetrate
the market at their competitors' expense.

Market Skimming:
- pricing the product above that of the competitors, when competition is minimal.

- May occur at the introduction stage of product life cycle

What type of firm is likely to use marketing skimming strategy?

- firms that have pricing objectives centered on generating a high profit and
recovering the costs of product development quickly.

What are the 8 questions for target costing?

1. Does price reflect quality?

2. Is the price competitive?

3. What pricing strategy?

4. What type of discount?

5. Different prices per segment?

6. Pricing options?

7. How prices are viewed?

8. Dumping laws?

Companion Products:
Products whose sale is dependent upon the sale of primary product.

Ex: Video games are dependent upon the sale of the game console.

(T/F) Dumping is defined as selling products at or below cost to get rid of excess
inventory and to undermine competition.
True

(T/F) Dumping represents a problem if it threatens to cause injury to an

established industry in a particular market and if it delays the establishment of a
viable domestic industry.
True

(T/F) Hard currency is currency that is accepted for payment by an international

seller.
True

(T/F) Countries with a shortage of soft currency reserves are more likely to engage
in countertrade.
False

- Countries with a shortage of hard currency reserves are more likely to engage in
countertrade.

Which of the following is NOT an external economic or financial factor affecting

pricing decisions?

A. Inflation pressure on price

B. Shortage of hard currency

C. Transfer pricing

D. Fluctuating exchange rates

C. Transfer pricing

- Inflationary pressures, shortage of hard currency, and fluctuating exchange rates

constitute external economic and financial factors that the company does not
control.

What company was responsible for initiating a countertrade relationship with the
soviet union in the late 1960s?

A. McDonalds

B. Pepsi

C. Philip Morris

D. None of the above

B. Pepsi

If a firm's objectives are centered on generating high profit and recovering

product development costs quickly, it is likely to use which one of the following
international pricing strategies?

A. Skimming

B. Penetration Pricing

C. Standardized Pricing

D. Competitive Pricing
A. Skimming