Business Explain: Pricing for International Markets

What is demand elasticity?

Refers to how demand for a product changes due to minor changes in the price. High elasticity means larger changes can occur without affecting the demand, whereas low elasticity means demand is very sensitive to changes in price.

Standardized/undifferentiated products are generally more sensitive to changes in price than differentiated products.

What factors influence international pricing?

1. Pricing objective

2. Competition

3. Target customer

4. Pricing controls

4. Price escalation

Which out of the four types of countertrade is the most beneficial to the seller?

The counter-purchase, as it provides the seller with more flexibility than the other types due to the time period, generally 6-12 months, to complete the second contract. During the time that markets are sought for the goods in the second contract, the seller has received full payment for the original sale. Further, the goods to be purchased in the second contract are generally of greater variety than those offered in a compensation deal.

Why is counter trade increasing?

There are a variety of reasons purchasers impose countertrade obligations on the seller.

1. The most important being a shortage of hard currencies. This is the most prevalent.

2. When a country produces a product in large quantities in which there is a low market demand, the country may offer products in counterpurchases as a means of getting rid of excess supply. Generally speaking, goods are offered for countertrade when there is a low or minimal market for the goods.

3. Another reason is because the country does not have an established international market in which to dispose of the goods. There may be a world market for the goods but the country does not have the ability or access to the market and thus may force products in countertrade.

Why do governments scrutinize transfer pricing arrangements so carefully?

Transfer pricing refers to when a company uses selective prices for internal transactions, and there are several reasons for governments to look over them carefully. Transfer pricing can be used to hide subsidiary profits and to escape foreign market taxes, by reaping the benefits of a lower tax rate in the country that the subsidiary resides.

What are the alternative objectives in setting transfer prices?

1. Lowering duty costs → goods shipped into high-tariff countries at minimal transfer prices, making duty base and duty low.

2. Reducing income taxes (in high-tax countries) → overpricing goods transferred to units in these countries, eliminates profits and shifts them to low-tax countries. Helps make financial statements look good too.

3. Facilitates dividend repatriation → invisible income may be taken out in the form of high prices for products or components shipped to units in that country.

4. Showing the feasible amount of profit → profit is flexible depending on who the company wishes to please.