CHAPTER 12 Pricing Decisions

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					CHAPTER TWELVE: Pricing Decisions

When Reebok, the world’s number two athletic shoe company, decided to enter India in
1995, it faced several basic marketing challenges. For one thing, Reebok was creating a
market from scratch. Upscale sports shoes were virtually unknown, and the most expensive
sneakers available at the time cost 1,000 rupees (about $23). Reebok officials also had to
select a market entry mode. There were two other issues as well: product and price. Should
Reebok create mass-market shoes specifically for India and priced at Rs 1,000, or offer the
same designs sold in other parts of the world and price them at Rs 2,500 ($58), the
equivalent of a month’s salary for a junior civil servant. As Reebok’s experience in India
illustrates, a basic issue in global marketing is establishing a pricing policy.

      To show that pricing decisions are a critical element of the marketing mix that
       must reflect costs, competitive factors, and customer perceptions regarding value.

      To explain the pricing strategies of market skimming, market penetration,
       market holding, and cost-plus pricing.

      To define Incoterms, terms of a sale such as ex-works, F.A.S., F.O.B., and

      To show how costs lead to price escalation, the accumulation of costs that occurs
       when transporting products abroad.

      To explain that expectations regarding currency fluctuations, inflation,
       government controls, and the competitive situation must be factored into pricing

      To show how global companies maintain competitive prices by shifting
       production sources as business conditions change.

      To categorize a company’s pricing policies as ethnocentric, polycentric, or

      To consider pricing issues such gray market goods and parallel imports, dumping,
       and transfer pricing.

      To explain how countertrade plays an important role in today’s global environment.
       Barter, counterpurchase, offset, compensation trading, cooperation agreements,
       and switch trading are countertrade options.

Lecture/Outline                                                                                P.P. 1

Two basic factors determine the boundaries for setting market prices.                          P.P. 2

Product cost establishes a price floor, or minimum price.

Prices for comparable substitute products create a price ceiling, or upper boundary.

Generally, international trade results in lower prices, which keep a country’s rate of
inflation in check.

Between the lower and upper boundary there is an optimum price, a function of the
demand for the product as determined by the willingness and ability of customers to buy.

Discussion Question #1: What are the basic factors that affect price in any market? What
considerations enter into the pricing decision?


Basic Pricing Concepts

In a true global market, the law of one price prevails: All customers could get the best
product available for the best price (e.g., a global market exists for crude oil).

Compact discs and other products are offered in national rather than global markets,
which reflect differences in costs, regulation, and rivalry (e.g., in Japan, beer price is a
function of the competition between Heineken, other imports, and five national

Companies must have pricing systems and policies that address price floors, price
ceilings, and optimum prices in each national market (e.g., companies in the euro zone
must adjust to new cross-border prices).

Within a corporation, there are interest groups and conflicting price objectives.


Global Pricing Objectives and Strategies                                                       P.P. 3

Marketing managers develop pricing objectives and strategies.

The overall goal may be an internal performance measure such as unit sales, market
share, or return on investment, but several pricing issues are unique to global marketing.

A pricing strategy may vary from country to country—low-priced, mass-market products
in some countries are premium priced in others.

Pricing objectives depend on a product’s life cycle stage and the country-specific
competitive situation.

External considerations factor in, such as added costs for shipping across national

Global pricing can be integrated in the design process, an approach used by the Japanese.


      Market Skimming and Financial Objectives                                              P.P. 4

When financial criteria such as profit and maintenance of margins are the objectives,
price is integral to the total positioning strategy.

Market skimming targets a segment willing to pay a premium price for a particular
brand or for a specialized product.

Companies that pursue differentiation strategies or position their products in the premium
segment use market skimming (e.g., Mercedes-Benz).

The skimming strategy is appropriate in the introductory phase of the product life cycle.
A high price limits demand to innovators and early adopters.

During the growth stage of the life cycle, competition increases and manufacturers cut
prices (e.g., Sony’s VCRs).


     Penetration Pricing and Non-Financial Objectives
Price can be used as a competitive weapon to gain or maintain market position.

Penetration pricing sets price levels low enough to quickly build market share (e.g.,
Sony Walkman in 1979).

A company can change objectives as a product proceeds through its life cycle and as
competitive conditions change (e.g., Fuji used penetration pricing to gain market share
against Kodak).

A first-time exporter is unlikely to use penetration pricing because the product may be
sold at a loss, and companies cannot absorb such losses.

Many companies launch new products not innovative enough for patent protection, but
penetration pricing achieves market saturation before competitors copy the product.


    Calculating Prices: Cost-Plus Pricing and Price Escalation                               P.P. 5
Considerations for setting price:
    Does the price reflect the product’s quality?
    Is the price competitive given local market conditions?
    Should the firm pursue market penetration, market skimming, or some other
      pricing objective?
    What type of discounts or allowances should be offered to international
    Should prices differ with market segment?                                                P.P. 6
    What pricing options are available if the firm’s costs increase or decrease?
      Is demand in the international market elastic or inelastic?
    Are the firm’s prices likely to be viewed by the host-country government as
      reasonable or exploitative?
    Do the foreign country’s dumping laws pose a problem?

Cost-based pricing is based on an analysis of internal and external costs.                    P.P. 7

The full absorption cost method defines per-unit product cost as the sum of all past or
current direct and indirect manufacturing and overhead costs.

When goods cross national borders, there are costs and expenses such as transportation,
duties, and insurance.

By adding the desired profit margin to the cost-plus figure, managers arrive at a final
selling price.

Rigid cost-plus pricing sets prices without regard to the considerations listed above. They
make no adjustments to reflect market conditions outside the home country.

The advantage of rigid cost-based pricing is its simplicity.

The disadvantage is that this approach ignores demand and competitive conditions in
target markets, setting prices too high or too low.

An alternative method, flexible cost-plus pricing, ensures that prices are competitive in a
particular market environment. Experienced exporters and global marketers use this

A rigid cost-plus approach can result in severe price escalation, with the result that
exports cost too much.

Flexible cost plus incorporates the estimated future cost method to establish the future

Discussion Question #2: Define the various types of pricing strategies and objectives
available to global marketers.


    Terms of the Sales                                                                     P.P. 8
The following activities take place when goods cross international boundaries:
    Obtain an export license if required
        Obtain a currency permit
        Pack goods for export
    Transport goods to the place of departure
    Prepare a land bill of lading
    Complete necessary customs export papers
    Prepare customs or consular invoices
    Arrange for ocean freight and preparation
    Obtain marine insurance and certificate of the policy

Incoterms apply to all modes of transportation.                                            P.P. 9

For ex-works, the seller places goods at the disposal of the buyer at the time specified in
the contract. The buyer takes delivery at the premises of the seller and bears all risks and

For delivered duty paid, the seller agrees to deliver the goods to the buyer at the place he
or she names in the country of import, with all costs, including duties, paid.

Several Incoterms apply to sea and inland waterway transportation:

      F.A.S. (free alongside ship) named port of destination: seller places goods
       alongside the vessel or other mode of transportation and pays all charges up to

       that point.

      F.O.B. (free on board): seller’s responsibility does not end until the goods have
       actually been placed aboard a ship.

      C.I.F. (cost, insurance, freight) named port of destination: risk of loss or
       damage to goods is transferred to the buyer once the goods have passed the ship’s

      C.F.R. (cost and freight): seller is not responsible at any point outside the

Price escalation occurs when these costs are added to the per-unit cost.               P.P. 10

The net effect of this add-on accumulating process is a total retail price of $50,210, or
166 percent of the ex-works price.

Experienced global marketers view price as a strategic variable that can achieve
marketing and business objectives.


Environmental Influences on Pricing Decisions                                               P.P. 11

Global marketers face environmental considerations when making pricing decisions:
currency fluctuations, inflation, government controls and subsidies, and competitive

Some factors work in conjunction with others, such as inflation and government controls.

    Currency fluctuations
Currency fluctuations create significant problems and opportunities.

A weakening of the home country currency swings exchange rates in a favorable

When the home currency strengthens, it is unfavorable because revenues are reduced
when translated into the home country currency.

Today’s business environment is characterized by “roller coaster”-style swings in
currency values.

Currency fluctuations affect prices and other elements of the marketing mix

(See Table 12-4).

The first two strategies focus on competitive issues besides price, productivity, and
cost reduction efforts.

Companies in the strong-currency country can absorb the cost of maintaining
international market prices at previous levels.

A market holding strategy is a flexible approach to reduce prices in response to
unfavorable currency swings.

When the domestic currency is weak, strategies include marginal-cost pricing to penetrate
new markets; the selling price equals the variable (incremental) costs of producing one
additional unit.

This approach is applicable for a manufacturer with excess capacity in a weak-currency
country if the sales levels cover fixed costs.

A manufacturer in multiple markets avoids price escalation by shifting production to
another country (e.g., Honda shifted production from Japan to Ohio to avoid raising
prices when the yen strengthened in the mid-1990s).

A producer in a weak-currency country cuts export prices to increase market share or
maintains prices for healthier profit margins.

EU buyers will have price transparency; they can comparison shop because goods are
now priced in euros.


     Inflationary environment
Inflation, a persistent upward change in price levels, is a worldwide phenomenon.

Inflation requires periodic price adjustments due to rising costs that must be covered by
increased selling prices.

An essential requirement is the maintenance of profit margins; a company that maintains
its margins protects itself from inflation (e.g., in Peru in the 1980s, Procter & Gamble had
biweekly increases in detergent prices of 20 to 30 percent).

Low inflation presents different pricing challenges (e.g., though the U.S. had low
inflation and strong demand in the 1990s, excess manufacturing, high European
unemployment, and the Asian recession made price hikes difficult).

Globalization, the Internet, and cost-consciousness among buyers became constraining


     Government controls, subsidies, and regulations
Governmental policies and regulations that affect pricing include dumping legislation,
resale price maintenance legislation, price ceilings, and reviews of price levels.

If government action limits price adjustment, the maintenance of margins is compromised.

In a country with severe financial difficulties or crisis, government officials are under
pressure to take action (e.g., Brazil).

When selective controls are imposed, foreign companies are more vulnerable than local
businesses (e.g., Procter & Gamble faced price controls in Venezuela in the late 1980s,
receiving only 50 percent of the price increases requested).

Government control can take the form of cash deposit requirements imposed on importers.
Such requirements encourage a company to minimize prices since lower prices mean
smaller deposits.

Government subsidies force a strategic use of sourcing to be price competitive (e.g., in
Europe, government subsidies to agriculture make it difficult for U.S. distributors to
compete on price).

Government regulations can affect prices in other ways (e.g., Germany’s move toward
deregulation improved market entry for insurance, telecommunications, and air travel

Change is coming to retailing; the Internet and globalization have forced the repeal of
archaic laws.


     Competitive behavior
Pricing decisions are affected by competitive action.

If competitors do not adjust prices in response to rising costs, management is constrained
in adjusting prices.

If competitors are manufacturing or sourcing in a lower-cost country, it is necessary to cut
prices to stay competitive (e.g., In the U.S., Levi Strauss faces stiff price competition
from the Wrangler and Lee brands. Outside the U.S., Levi jeans command premium

    Using Sourcing as a Strategic Pricing Tool
Manufacturers may be forced to switch to offshore sourcing to keep costs and prices

The Far East and South America are low-cost sources of production (e.g., U.S. bicycle
manufacturers rely on production sources in China and Taiwan).

Another option is an audit of the distribution structure in the target markets.

A rationalization of the distribution structure can reduce markups required to achieve

Rationalization includes selecting new intermediaries, reassigning responsibilities, or
establishing direct marketing (e.g., in Japan, Toys ‘R’ Us bypasses layers of distribution
and uses warehouses).

Discussion Question #3: Identify some of the environmental constraints on global
pricing decisions.


Global Pricing: Three Policy Alternatives                                                    P.P. 12

What pricing policy should a global company pursue? There are three pricing alternatives.

    Extension/Ethnocentric                                                                 P.P. 13
An extension or ethnocentric pricing policy calls for the per-unit price of an item to be the
same worldwide.

The importer absorbs freight and import duties.

The advantage is simplicity. The disadvantage is that it fails to respond to each national
market and/or maximize profits (e.g., Mattel gave little consideration to price levels by
making Holiday Barbie overpriced in global markets).

Mercedes-Benz executives have recently moved beyond ethnocentric pricing.


Adaptation/Polycentric                                                                        P.P. 14

Adaptation or polycentric pricing permits subsidiary managers or independent distributors
to establish the price they feel is most desirable in their circumstances.

There is no requirement that prices be coordinated.

This approach is sensitive to local market conditions, but creates potential for a gray
market—goods purchased in the low-price markets and sold in high-price markets.

Valuable knowledge and experience concerning pricing do not reach local pricing


    Invention/Geocentric                                                                     P.P. 15
Geocentric pricing represents an intermediate course of action.

Geocentric pricing recognizes that several factors are relevant to pricing decisions: local
costs, income levels, competition, and the local marketing strategy.

Price is integrated with other elements of the marketing program (e.g., a “pull” strategy
with mass media advertising and intensive distribution needs an appropriate price given
advertising costs).

The geocentric approach also consciously and systematically seeks to ensure that
accumulated national pricing experience is leveraged and applied wherever relevant.

Local costs plus a return on invested capital and personnel fix the price floor for the long

In the short term, headquarters might set a market penetration objective and price at less
than the cost-plus return figure.

Another short-term objective might be an estimate of the market potential at a profit with
local sourcing and a certain scale of output.

For consumer products, local income levels are critical; a product priced above
manufacturing costs should be priced below prevailing levels in low-income markets.

Only the geocentric approach lends itself to global competitive strategy.

Prices support strategy objectives, not maximizing performance in a single country.

Discussion Question #7: What is the difference between ethnocentric, polycentric, and
global pricing strategies? Which one would you recommend to a company that has global
market aspirations?


Gray Market Goods                                                                           P.P. 16

Gray market goods are trademarked products that are exported from one country to
another where they are sold by unauthorized persons or organizations.

This practice, known as parallel importing, flourishes when a product is in short supply,
when producers use skimming strategies in certain markets, or when the goods are subject
to substantial markups (e.g., French champagne sold in the U.S at prices that undercut
importers’ prices).

In another scenario, a company manufactures a product in both the home country market
and a foreign market; products manufactured abroad are sold to gray marketers, who
bring the products into home-country market.

Buyers gain from lower prices and increased choice (e.g., in the United Kingdom, total
annual retail sales of gray market goods are estimated at $1.6 billion).

In the U.S., gray market goods are subject to the Tariff Act of 1930. Section 526 forbids
importation of goods of foreign manufacture without the permission of the trademark

The U.S. Customs Service, which implements the regulation, and the court system have
leeway in decisions regarding gray market goods.

In many instances, the court’s interpretation of the law differs from that of the Customs

One legal expert argues that the U.S. Congress should repeal Section 526 and require gray
market goods to bear labels explaining differences between them and goods from
authorized channels.

Other experts believe that improved market segmentation and product differentiation
would make gray market products less attractive.

The Internet is a powerful new tool that allows gray marketers to access pricing
information and reach customers.

Discussion Question #4: Why do price differences in world markets often lead to gray


Dumping                                                                                      P.P. 17

Dumping is the sale of an imported product at a price lower than that normally charged
in a domestic market or country of origin.

The U.S. Congress has defined dumping as an unfair trade practice that results in “injury,
destruction, or prevention of the establishment of American industry.”

Dumping occurs when imports sold in the U.S. market are priced either at levels that
represent less than the cost of production plus an 8 percent profit margin or at levels
below those prevailing in the producing country.

In Europe, the European Commission administers antidumping policy.

Dumping was a major issue in the Uruguay round of GATT negotiations, and a
significant change is the addition of a “standard of review.”

The agreement brought GATT standards into line with U.S. standards.

The last few years have seen an increased incidence of antidumping investigation and
penalties. Many U.S. dumping cases involve manufactured goods from Asia.

To prove dumping, both price discrimination and injury must be demonstrated.

Price discrimination sets different prices when selling the same quantity of “like-
quality” goods to different buyers.

Companies concerned with violating antidumping legislation differentiate the product so
it does not represent “like-quality.”

Another approach is to make nonprice competitive adjustments in arrangements with
affiliates and distributors.

Discussion Question #5: What is dumping? Why was dumping such an important issue
during the Uruguay Round of GATT negotiations?


Transfer Pricing                                                                               P.P. 18

Transfer pricing refers to the pricing of goods, services, and intangible property bought
and sold by operating units or divisions of a company doing business with an affiliate in
another jurisdiction.

Transfer pricing concerns intracorporate exchanges—transactions between buyers and
sellers that have the same corporate parent (e.g., Toyota subsidiaries sell to, and buy from,
each other).

Intracompany shipments by non-U.S. companies to U.S. units represent one-fourth of U.S.
merchandise shipments.

In determining transfer prices, companies consider taxes, duties and tariffs, country profit
transfer rules, conflicting objectives, and regulations.

Tax authorities take a keen interest in transfer pricing policies.

Transfer pricing will be a key issue in Europe after the Euro makes it easier to audit
transfer-pricing policies.

Three approaches to transfer pricing vary with the nature of the firm, products, markets, and
historical circumstances.

      Cost-based transfer pricing takes the same forms as the cost-based pricing,
       including full cost and estimated future cost.

      Market-based transfer price is tied to the price required to be competitive in the
       international market.

       Companies have outsourcing options, which apply pressure to control and cut costs
       to compete with outside vendors.

      Negotiated transfer prices are set by the organizations themselves.

Discussion Question #6: What is a transfer price? Why is it an important issue for
companies with foreign affiliates? Why did transfer pricing in Europe take on increased
importance in 1999?


     Tax regulations and transfer prices
There is an incentive to maximize income in countries with low tax rates and minimize
income in high-tax countries.

In response, governments maximize national tax revenues by examining company returns
and mandating reallocation of income and expenses.


     Sales of tangible and intangible property
Section 482 of the U.S. Treasury regulations deals with controlled intracompany transfers
of raw materials and finished and intermediate goods, and intangibles such as charges for
the use of manufacturing technology.

The general rule that applies to sales of tangible property is known as the “arm’s-length”
formula, defined as the price that would have been charged in independent transactions
between unrelated parties under similar circumstances.

     Competitive pricing
If only the arm’s-length standard is applied, a company may not be able to respond to the
competitive factors that exist in every market, domestic and global.

Fortunately, the regulations provide an opening for the company that seeks to be price-
competitive or to aggressively price U.S.-sourced products globally.

Many interpret the regulations such that a company can reduce prices and increase
marketing expenditures through an affiliate to gain market share.

This is because market position represents an investment and an asset.

The regulations are also interpreted to permit a company to lower its transfer price to
enter a new market or meet competition in an existing market.

Companies must have latitude in making price decisions to achieve success in
international markets.

Discussion Question #8: If you were responsible for marketing CAT scanners worldwide
(average price, $1,200,000) and your country of manufacture was experiencing a strong

and appreciating currency against almost all other currencies, what options are available
to you to maintain your competitive advantage in world markets?


    Importance of Section 482 regulations
The pricing rationale must conform with the intention of Section 482 regulations.

The IRS issued regulations in 1993 requiring participation of management and marketing
personnel in transfer pricing decisions, as opposed to the tax department personnel.

Companies must demonstrate that pricing methods result from informed choice, not

The government seeks to prevent tax avoidance and ensure fair distribution of income from
global companies.

The government does not always succeed in enforcing Section 482 (e.g., Merck won a
suit against the U.S. government on the grounds that the IRS’s allocation of 7 percent of
the income from a wholly-owned subsidiary to the parent company was “arbitrary,
capricious, and unreasonable”).

Even companies that try to comply with regulations and document this effort may find
themselves in tax court.


Joint ventures

Joint ventures present an incentive to set transfer prices at higher levels because a
company’s share of the earnings is less than 100 percent.

Any profits in the joint venture must be shared.

The frequency of audits is an incentive to find an agreement acceptable to tax authorities.

The criterion of “arm’s-length” prices is appropriate for the majority of joint ventures.

To avoid potential conflict, companies with joint ventures should have pricing
agreements considering:

      The way in which transfer prices are adjusted in response to exchange-rate
      Expected reductions in manufacturing costs arising from improvements and
       reflected in transfer prices.
      Shifts in sourcing from parents to alternative sources.
      The effects of competition on volume and margins.


                 Open to Discussion: Is Competitiveness a Dangerous Obsession?

   Stanford University economist Paul Krugman offers the following proposition: We can only
   be competitive in the new global economy if we forge a new partnership between government
   and business. Krugman’s complaint is that fundamental economic concepts—especially
   comparative advantage—are being misinterpreted, misapplied, or ignored altogether in the
   name of public policy.

   First, Krugman says that America is not “part of a truly global economy” because most U.S.
   produced goods and services are for domestic consumption. Next, he disputes the idea that
   America “competes in the global marketplace” because Japan, the U.S., and others do not
   compete in the manner of Coca-Cola and PepsiCo. Third, he opposes linking higher U.S.
   productivity with international trade because improved productivity in other nations does not
   make the U.S. less competitive. Finally, if strategic traders heed the message of “rhetoric of
   competitiveness,” the results could have undesirable consequences.

   Q: What are the consequences of the “rhetoric of competitiveness”?

   A: It could lead to wasteful government spending to enhance competitiveness, protectionism
   and trade wars, or poor public policy decisions.


Countertrade                                                                                    P.P. 19

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

In a countertrade transaction, a sale results in product flowing in one direction to a buyer;
a separate stream of products and services, often flowing in the opposite direction, is also

Countertrade generally involves a seller from the West and a buyer in a developing
country (e.g., former Soviet bloc countries rely on countertrade).

Countertrade flourishes when hard currency is scarce. Exchange controls prevent a company
from expatriating earnings, forcing it to spend money in country for export products.

Several conditions affect countertrade such as the priority attached to the Western import,
the value of the transaction, and the availability of other suppliers.

If competitors deal on a countertrade basis, a company has little choice but to agree or
risk losing the sale altogether.

Developing economies gain access to Western expertise, technology, and the creation of
hard currency export markets.

The U.S. government opposes countertrade, which represents a bilateral trade agreement
that violates free trade as established by GATT.

Two categories of countertrade include barter and mixed forms of countertrade—
counterpurchase, offset, compensation trading, cooperation agreements, and switch


    Barter
Barter is a direct exchange of goods or services between two parties.

No money is involved, but both partners approximate a price for products flowing in each

Companies sometimes seek outside help from barter specialists (e.g., in the Soviet era,
PepsiCo bartered soft-drink syrup concentrate for Stolichnaya vodka, exported to the U.S.
and marketed by M. Henri Wines).


     Counterpurchase
This form of countertrade, also termed parallel trading or parallel barter, is paid for in cash.
(e.g., Rockwell International sold a printing press to Zimbabwe for $8 million and purchased $8
million in ferrochrome and nickel, which it sold).

Generally, products offered by the foreign principal are not related to the Western firm’s
exports and cannot be used by the firm.

In most counterpurchase transactions, two contracts are signed; the supplier sells products
for cash and purchases unrelated products.


     Offset
Offset is a reciprocal arrangement whereby the government in the importing country
recovers large sums of hard currency spent on expensive purchases, such as military
aircraft or telecommunications systems.

The government says, “If you want us to spend government money on your exports, you
must import products from our country.”

Offset arrangements may involve manufacturing, technology transfer, local subcontracts,
or local assembly (e.g., Lockheed Martin sold F-16 fighters to the United Arab Emirates
for $6.4 billion and invested $160 million in the petroleum-related UAE Offsets Group).

Offset differs from counterpurchase, characterized by smaller deals in a short time frame.

Offset is not a contract but a memorandum of understanding with the value to be offset and
a time frame.

There is no penalty on the supplier for nonperformance.

Offsets have become controversial. To win sales in markets such as China, companies
face demands for offsets when transactions do not involve military items.


    Compensation trading
Buyback involves two separate and parallel contracts.

In one, the supplier agrees to build a plant or provide plant equipment, patents or licenses,
or technical, managerial, or distribution expertise for a hard currency down payment at
the time of delivery.

In the other, the supplier company agrees to take payment in the form of the plant’s
output equal to its investment (minus interest) for up to 20 years.

The success of compensation trading rests on the willingness to be both a buyer and a
seller (e.g., Egypt used this approach to develop an aluminum plant with a Swiss

Compensation differs from counterpurchase because the technology or capital is related
to the output produced.


     Cooperation agreements
Each cooperation agreement represents an accommodation to the needs of trading

They include cooperation and simple barter (triangular deals); cooperation and
counterpurchase; and cooperation, counterpurchase, and credit by a bank.

Problems with these arrangements include finding two industrial-country firms with a
supply-demand fit and the flexibility to handle delays in payment or delivery.


    Hybrid countertrade arrangements
Hybrid forms of countertrade are becoming prevalent (e.g., countries such as Brazil,
Mexico, and even Canada now make investment proposals contingent on commitments to

Project accompaniment is a condition to the exchange of industrial goods by the West for
oil from the Middle East.


    Switch trading
Also called triangular trade and swap, switch trading can be applied to barter or

A professional switch trader, switch trading house, or bank steps into a simple barter or
other countertrade arrangement when one party does not accept all the goods in a

Switching provides a “secondary market” for goods and reduces the inflexibility inherent
in barter and countertrade.

Switch traders charge fees from 5 percent of market value for commodities to 30 percent
for high-technology items.

Switch traders develop networks and are headquartered in Vienna, Amsterdam, Hamburg,
and London.

Advantages include: (1) economic efficiency in pricing and increased trade; (2)
discounted prices to open new markets; and (3) no responsibility for marketing goods
received in countertrade.

Disadvantages include: (1) disruptions when switch dealers discount; (2) products in
oversupply or difficult to sell; (3) assessment of the Western firm as uncommitted to a
long-term trade relationship; and (4) complex transactions.

Discussion Question #9: Compare and contrast the different forms of countertrade.


Discussion Questions

1. What are the basic factors that affect price in any market? What considerations enter
into the pricing decision?

One factor is the price floor, which can be linked to product cost or some other
consideration. For example, in the fall of 1996, Florida tomato growers concerned about
cheap tomatoes from Mexico persuaded the U.S. government to impose a price floor of
21 cents per pound on Mexican tomatoes.

A second basic factor is the price ceiling, an upper limit created when comparable
products are available. As industries globalize, consumers should enjoy lower prices
unless national or regional protective barriers are erected to imports. The U.S. market for
entry-level luxury cars is crowded with imported nameplates, and price competition in the
entry-level category is fierce among Lexus, Infiniti, Mercedes-Benz, and BMW. In the
Mercosur countries, on the other hand, external tariffs on motor vehicles are still as high
as 70 percent. Thus, many consumers in Brazil, Argentina, Uruguay, and Paraguay must
buy locally produced vehicles at high prices.

Finally, between these two extremes there is an optimum price. Many Japanese
companies have struggled to find the optimum price in view of a strong and fluctuating

Some pricing considerations noted in Chapter 12 include:
    Whether or not a product’s quality is reflected in the price
    How to price to different segments
    Determining the latitude to adjust prices if costs change
    Enforcement of dumping laws

2. Define the various types of pricing strategies and objectives available to global marketers.

The three strategies discussed in the chapter are market skimming, penetration pricing, and
market holding or status quo pricing. Market skimming is appropriate in the introductory
phase of the product life cycle if there is little competition or few acceptable substitutes.
Skimming can be the quickest way for a company to recoup product development and
marketing costs. For example, Sony's PlayStation 2 (PS2) was launched at $299; in an
effort to further increase its customer base, Sony lowered PS2's price to $199 in May 2002.
The price of the original PlayStation, which at this point was $99, was dropped to $49.
Archcompetitor Microsoft matched the $100 price cut on its Xbox player.

With a penetration pricing strategy, a relatively low price is established in an effort to gain
market share. This strategy has historically been favored by Japanese companies that take a
longer-term view of profitability. RCA has clearly switched from skimming to penetration
as DSS enters the growth phase of the product life cycle.

Status quo pricing is particularly important in global marketing because currency
fluctuations can drive up product prices in export markets. To avoid a sales decline, a
company should be prepared to adjust prices. Another option is to try to cut fixed or
variable costs.

3. Identify some of the environmental constraints on global pricing decisions.

Currency fluctuations are an important consideration in global marketing. Inflation is
another factor in the economic environment that may force a company to make frequent
price changes. Government regulations can hinder or prohibit a company’s efforts to
adjust costs. Finally, the presence or absence of competitors directly affects a company’s
flexibility with prices. In the absence of competitive restraints, a company can charge
whatever the market will bear. In Switzerland, for example, there is little competition for
imported Chevy S pickup trucks, so the price per vehicle is nearly double the typical price
paid in the U.S.

4. Why do price differences in world markets often lead to gray marketing?

Price differentials mean opportunities to engage in arbitrage. “Buy low, sell high” is the
operative phrase, and many entrepreneurs are quick to capitalize on the chance to make
some quick money. On the consumption side, many buyers jump at the chance to save
money. They are willing to ignore issues such as buying from “authorized dealers.”

5. What is dumping? Why was dumping such an important issue during the Uruguay Round
of GATT negotiations?

Dumping is the practice of selling goods in foreign markets at prices that are lower than the
cost of production or lower than the home-country price. During the GATT negotiations,
government representatives from some countries expressed concern that enforcement of
U.S. antidumping policies always favored the U.S. For its part, the U.S. negotiators were
concerned about the relative absence of due process in overseas dumping cases.

6. What is a transfer price? Why is it an important issue for companies with foreign affiliates?
Why did transfer pricing in Europe take on increased importance in 1999?

A transfer price is the price one unit of a company charges to another company unit for
goods and services. Transfer prices can be determined on the basis of the market, or by
negotiation between the company’s various units. Companies under the jurisdiction of
U.S. tax laws must comply with Section 482, the portion of the Internal Revenue Code
that deals with controlled intracorporate transfers.

7. What is the difference between ethnocentric, polycentric, and global pricing
strategies? Which one would you recommend to a company that has global market

An ethnocentric pricing policy calls for the price of a particular product to be the same in
every part of the world. When management uses this approach it foregoes opportunities
to set prices higher in countries where a lower price is required. A polycentric approach
relies on adaptation of country managers who attempt to be as responsive as possible to
local market conditions. One problem with the polycentric approach is that it creates
conditions in which gray marketing can flourish. A geocentric pricing approach balances
the desire for long-term returns on investment with shorter-term considerations such as
market share. The geocentric approach is most appropriate for a company with a global
strategy and global aspirations.

8. If you were responsible for marketing CAT scanners worldwide (average price,
$1,200,000) and your country of manufacture was experiencing a strong and
appreciating currency against almost all other currencies, what options are available to
you to maintain your competitive advantage in world markets?

The real issue here is not just options for adjusting prices, but options that will allow the
marketer to maintain competitive advantage. One option is to shift manufacture to one or
more weak-currency countries. If that is not feasible, another medical-products company
could become license under license. Another option is to keep manufacturing in the
strong currency country, focusing on cost-cutting efficiencies and/or product innovation
and improvements that will differentiate the scanners. A lower cost, “no frills” model can
be developed for some markets.

9. Compare and contrast the different forms of countertrade.

Companies barter when buyers are unable to pay in cash, or when a country’s currency is
not freely convertible in foreign exchange markets. Barter is a category of countertrade in
which goods, but no money, is exchanged. Other forms of countertrade, including
countertrade, offset, and compensation trading, may also involve exchanging money or

Teaching Tools and Exercises

I. Assign the following article for outside reading and class discussion:

Mehafdi, Messaoud. “The Ethics of International Transfer Pricing.” Journal of Business
Ethics 28, no. 4 (December 2000) pp. 365-381.

II. You are contemplating a price change for an established product sold by your global
firm. Write a memo analyzing the factors you need to consider in your decision.

III. Internet exercise: Price Fixing. To find out about current price-fixing cases, type
“price fixing” into your favorite Internet search engine. Compare the information you find
there with some of the companies’ own Web pages. How do companies deal with this
type of scandal on their Web sites? Does this surprise you?

IV. Interview a local business about its pricing philosophy and/or strategy. Apply what
you hear to the strategies described in the chapter and assess the approach. What are the
similarities and differences?

Case 12-1        Pricing AIDS Drugs in Emerging Markets

1. Given the discount prices that Merck and the other global drug companies are making
available in Africa and other developing countries, are they charging too much for AIDS
drugs in the United States? Should they be required to disclose their cost structures?

The standard argument of the pharmaceutical companies is that the cost of research and
development is so high that high drug prices are needed to cover the costs. Without these
high prices, it would not be possible to develop new drugs to fight AIDS. The feeling is that
it is in the consumer’s best interest to keep drug prices high. However, most AIDS patients
in the United States cannot afford the high drug prices. They are forced to spend a
disproportionate amount of their disposable income for medication, which they need to stay
alive. The drug companies should provide some type of sliding scale for AIDS drugs in the
United States to make them affordable to all AIDS patients.

The drug companies should be required to disclose their cost structures, which might, in
turn, improve their public image. If research and other costs are extremely high, the public

might find high prices more acceptable. The drug companies have not made their case that
their costs warrant their prices.

 2. Do you think intellectual property laws in countries such as South Africa should be
changed to allow generic producers such as Cipla access to the market?

Yes. For humanitarian reasons, generic producers should such as Cipla should have
access to the market. It is a question of ethics; AIDS is increasing in Africa as adults,
children, and babies die every day. Merck, Glaxo, and others can compete on non-price
variables to maintain or increase market share. For example, if these companies hired
spokespersons in the villages to provide patient education, it would give these companies
the edge over Cipla in the short term.

3. What should Merck, Glaxo, and other pharmaceutical manufacturers do to improve
their image with the general public?

The pharmaceutical manufacturers need to change their public image as companies that
make money from deadly diseases to the image of patient advocates, deeply concerned
with saving the lives of AIDS patients. They need to participate and/or organize AIDS
education programs to assure that the drugs are used correctly in conjunction with a
proper diet. The companies should become visible participants in worldwide AIDS
marches, conferences, and fundraisers. The companies should stress policies of
social responsibility—a for-profit company using its tremendous resources to help AIDS
victims worldwide.

Case 12-2 LVMH and Luxury Goods Marketing

Leadoff question/activity: Ask students whether they own any fake luxury goods (e.g.,
knockoffs of Rolex, Gucci, etc.) Better still; ask them to bring in fakes plus genuine
luxury goods for comparison.

1. Bernard Arnault has built LVMH into a luxury goods empire by making numerous
acquisitions. What strategy is evident here?

Arnault wants luxury to appeal to to everyone, not just the global elite. The basic problem is
making luxury brands available to a broader market without alienating the core consumer of
luxury products. The proliferation of licensing deals threatens to dilute the exclusivity of the
brands. Designer sunglasses, hosiery, and other products are more affordable to the mass market,
but if “everybody” is wearing the brand, then how luxurious is it?

3. Summarize how LVMH executives adjust prices in response to changing economic

Executives raise wholesale prices in an effort to prevent discount retailers from purchasing
designer products for resale in mass market outlets. They also raise prices in countries that have

experienced currency devaluations. Finally, cutting back on advertising and other promotional
expenses helps maintain profitability. The timing of LVMH’s $2.5 billion investment in DPS—
just prior to the Asian currency crisis—was certainly unfortunate. It does, however, illustrate the
risks that are present in the global arena. However, as Japan’s economic picture improves,
tourism will undoubtedly pick up again. Meanwhile, Mr. Arnault should close stores that are not

3. Do you think the high retail prices charged for luxury goods are worth paying?

As every student of marketing should know, value assessments are, ultimately, in the eye of the
beholder. The promise of higher quality or exclusivity may justify premium prices; many luxury
brands are aspirational in the sense that consumers buy them in an effort to attain their idealized
self image. In most cases, luxury products are characterized by superior craftsmanship. For
example, the stitching on the straps of a fake Prada purse is likely to fray in a very short time,
while the “genuine article” is built to last. Beyond that, however, luxury goods prices are based
on perceived exclusivity and differentiation of the brands.

4. How will luxury goods marketers be affected by the slowdown in tourism that followed the
terror attacks of September 11, 2001?

Before the terror attacks, consumer confidence in the United States was high and the economy
was on roll; many consumers wanted “the best,” which meant luxury brands. LVMH saw
operating profits drop of 20% in 2001; the company projects that operating profits would climb
more than 10% in 2002. However, many in the industry predict that the recovery will be slow.
Many Japanese consumers, a key segment of the luxury market, continue to stay home.

                              Chapter 12 — Pricing Decisions

12-1            When Reebok began marketing athletic shoes in India, it offered them at low
Easy            prices that would be affordable for the mass market.
F; p. 445

12-2            The manufacturing cost of a product creates a price ceiling that marketers must
Med             not exceed.
F; p. 445

12-3            Comparable products from a company’s competitors create a price ceiling that
Med             constrains a marketer’s ability to raise prices.
T; p. 445

12-4        The law of one price applies to most products and services that are marketed
Med         worldwide today.
F; p. 446

12-5        The law of one price applies to commercial aircraft, the market for which is truly
Med         global in nature.
T; p. 446

12-6        Budweiser is the world’s leading beer brand with more than 50 percent share of
Med         the global market.
F; p. 446

12-7        The advent of the Euro will contribute to cross border price transparency in the
Med         12-country Euro zone.
T; p. 447

12-8        Luxury goods companies such as LVMH rely heavily on profit-based pricing
Med         objectives and strategies.
T; p. 447

12-9        When Sony launched its Betamax VCRs in the United States in the 1970s, it used
Med         a market skimming strategy.
T; p. 448

12-10       When Sony launched its Betamax VCRs in the United States in the 1970s, it used
Med         a penetration pricing strategy.
F; p. 448

12-11       “Market skimming” is a strategy that uses low prices as a competitive weapon to
Easy        gain market position.
F; p. 448

12-12       According to the discussion in Chapter 12, Sony used penetration pricing when it
Easy        launched the Walkman personal stereo in 1979.
T; p. 448

12-13       According to the discussion in Chapter 12, Sony used penetration pricing when it
Easy        launched portable CD players in the mid-1980s.
T; p. 448

12-14       Market skimming has been a key component in Fuji’s strategy for marketing
Easy        photo film in competition with Kodak in the United States.
T; p. 449

12-15       If the terms of trade for an export transaction specify “ex-works,” the
Med         exporter/seller pays all expenses incurred until the product is delivered to the
F; p. 451   importer/buyer’s warehouse.

12-16       To protect against possible losses from currency exchange rates, exporters add a
Hard        charge known as “CIF” to the ex-works price of most export shipments.
F; p. 452
12-17       To protect against possible losses from currency exchange rates, exporters add a
Hard        charge known as “CAF” to the ex-works price of most export shipments.
T; p. 452
12-18       Currency fluctuations mean that companies doing business in global markets
Med         should regularly review prices and make adjustments when conditions dictate.
T; p. 454
12-19       When the yen reaches “parity” with the dollar, the exchange rate is ¥1=$1.
F; p. 456

12-20       Suppose the Japanese yen is weak in relation to the U.S. dollar. Japanese firms
Med         should be able to stress price benefits for products exported to the United States.
T; p. 456

12-21       Suppose the Japanese yen is weak in relation to the U.S. dollar. Rather than
Med         stressing price benefits, Japanese companies exporting to the United States should
F; p. 456   emphasize quality improvements and after sales service.

12-22       Improved price transparency in the Euro zone is expected to lead to greater price
Med         disparities.
F; p. 457

12-23       In countries where high inflation is the rule, companies should make price
Med         adjustments to maintain operating margins.
T; p. 457

12-24       Germany has traditionally severely restricted competition in a number of
Med         industries.
T; p. 459

12-25       Thanks to the Internet and globalization, the German government has recently
Med         repealed laws limiting retailers’ freedom to discount prices and give away free
T; p. 459   merchandise.

12-26       Dieter Zietsche, sales chief at Germany’s Mercedes-Benz, once said that, in
Med         setting prices, “We know what the customer wants, and he will have to pay for it.”
T; p. 460   This is an example of an ethnocentric pricing policy.

12-27       When subsidiary country managers are given broad discretion to set prices in their
Med         markets, a polycentric pricing strategy is in evidence.
F; p. 461

12-28       “There are some countries where we set higher prices, and some countries where
Med         we set lower prices.” This remark could be interpreted as evidence of an
F; p. 462   ethnocentric approach to pricing.

12-29           “Parallel importing” and “gray marketing” are essentially the same activity.
T; p. 463

12-30          Gray marketers are, in essence, guilty of distributing trademarked goods without
Easy           authorization.
T; pp. 463–464

12-31           Any company that engages in exporting should take antidumping laws into
Easy            account when setting prices for export markets.
T; p. 465

12-32           A global company that uses market skimming as a pricing strategy is likely to
Easy            invite charges of “dumping” by competitors in host-country markets.
F; p. 465

12-33           Dumping is a legal strategy used by companies to gain share in international
Easy            markets.
F; p. 465

12-34           Dumping cases filed in the United States against foreign companies rarely are
Med             resolved in favor of U.S. producers.
F; p. 466

12-35           A company that uses full-cost pricing in export markets runs the risk of being
Med             investigated for dumping.
F; p. 466

12-36           Worldwide, the number of antidumping investigations has declined markedly in
Med             recent years.
F; p. 466

12-37           According to current GATT standards, governments cannot penalize foreign
Hard            companies for dumping if the export price of a given product differs from the
T; p. 466       domestic price by less than 2 percent.

12-38           Japanese firms tend to use cost-based transfer pricing methods more than market-
Hard            based methods.
T; p. 468

12-39           Historically, countertrade deals have involved buyers/importers in Western
Med             countries and sellers/exporters in developing countries.
F; p. 470

12-40           Barter is the most sophisticated form of countertrade.
F; p. 472

12-41             During the Soviet era, the Coca-Cola Company accepted Stolichnaya vodka as
Med               payment for its soft-drink syrup.
F; p. 473

12-42             Lockheed and other military aircraft marketers are likely to face requests for
Med               offsets before closing a sale in the Middle East.
F; p. 473

12-43             Offset countertrade arrangements, by definition, are contractual in nature.
F; p. 474

12-44          Cipla is a generic drug manufacturer based in Brazil.
F; pp. 478–479

12-45             Bernard Arnault, the “pope of high fashion,” is the chairman of Armani.
F; pp. 480–

Multiple Choice

12-46             For which of the following products does a true global market exist such that the
c                 “law of one price” holds true:
Med               a. compact discs
p. 446            b. beer
                  c. commercial aircraft
                  d. prescription drugs

12-47             For which of the following does a true global market exist such that the “law of
e                 one price” holds true:
Med               a. commercial aircraft
p. 446            b. crude oil
                  c. integrated circuits
                  d. none of the above
                  e. all of the above

12-48             Which of the following illustrates nonfinancial pricing objectives:
e                 a. market coverage
Med               b. return on investment
p. 446            c. market share
                  d. profit maximization
                  e. both a and c

12-49         The global beer industry would best be described as a _______________ industry.
a             a. fragmented
Med           b. concentrated
p. 446        c. multilocal
              d. cottage

12-50         Anheuser-Busch is the world’s largest brewer; in the United States, its brands
a             command nearly 50 percent of the market. Which of the following most
Med           accurately states the global market share of the Budweiser brand:
p. 446        a. 4 percent
              b. 14 percent
              c. 24 percent
              d. 34 percent
              e. 44 percent

12-51         Which of the following most accurately reflects the impact of international
a             competition on prices in a particular country market:
Med           a. lower prices typically result
p. 447        b. higher prices typically result
              c. international competition has no impact on price levels
              d. international competition generally leads to charges of “dumping”

12-52         Which pricing strategy would be most appropriate for a marketer of luxury
b             designer brands:
Med           a. gray market
p. 447        b. skimming
              c. penetration
              d. market holding
              e. cost based

12-53         If the manufacturer of a sophisticated new consumer electronics product
b             determines that many target consumers qualify as “innovators” and “early
Med           adopters” with relatively inelastic demand curves, the company should use the
pp. 447–448   _______________ pricing strategy:
              a. gray market
              b. skimming
              c. penetration
              d. market holding
              e. cost based

12-54         Which pricing strategy did Sony use when launching the Walkman personal
c             stereo:
Med           a. gray marketing
p. 448        b. skimming
              c. penetration
              d. market holding
              e. cost based

12-55         Excelsior Corp. launches a new hand-held personal digital assistant (PDA) for
a             busy corporate executives. The initial retail price is set at $699. One year later, in
Med           an effort to reach a broader market, the price is lowered to $299. Which of the
pp. 447–448   following describes the pricing strategies used by Excelsior Corp:
              a. skimming strategy followed by penetration strategy
              b. penetration strategy followed by cost based strategy
              c. penetration strategy followed by skimming strategy
              d. penetration strategy only
              e. skimming strategy only

12-56         A firm without much export experience uses the rigid cost-plus pricing method.
e             Which of the following considerations is the exporter ignoring:
Med           a. Is the price competitive in view of local market conditions?
p. 449        b. Does the price reflect the product’s quality?
              c. Will authorities in export markets view the price as reasonable or exploitative?
              d. Does the price take antidumping laws into consideration?
              e. all of the above

12-57         Which pricing strategy has the advantage of being simple to calculate but the
e             disadvantage of ignoring demand and competitive conditions:
Med           a. gray marketing
pp. 449–450   b. skimming
              c. penetration
              d. market holding
              e. cost based

12-58         _______________ is the phrase global marketers use to describe price increases
d             that result from the costs associated with moving products across borders:
Easy          a. Price elevation
p. 452        b. Price balloon
              c. Price levitation
              d. Price escalation
              e. Price inflation

12-59         Which of the following is not an accurate statement about export price escalation:
c             a. Price escalation results in products costing more in export markets than in the
Med           producer’s domestic market.
pp. 451–452   b. The producer may discount the product’s price in export markets to remain
              c. Price escalation usually results in “dumping” charges against the exporter.
              d. Price escalation can be the result of longer distribution channels required for

12-60         Which of the following Incoterms apply to all modes of transportation:
e             a. ex-works
Med           b. FAS
pp. 451–452   c. delivered duty paid
              d. FOB
              e. both a and c

12-61         A manufacturer attempting to set prices for its products in export markets must
d             realize that CAF, VAT, duties, and distributor margins all lead to:
Med           a. currency devaluations
pp. 452–453   b. dumping charges
              c. market skimming
              d. price escalation

12-62         A manufacturer concerned about price escalation in export markets might do all but
c             which of the following:
Med           a. attempt to shorten distribution channels
pp. 452–453   b. switch to offshore sourcing
              c. pursue gray marketing
              d. license the product to a host-country manufacturer

12-63         If a distributor’s margins are based on the “landed” price of an import shipment,
e             they will be based on:
Med           a. ex-works price
pp. 452–453   b. transportation costs
              c. insurance costs
              d. VAT
              e. all of the above

12-64         Which of the following does not contribute to price escalation in global
c             marketing:
Med           a. shipping and insurance charges
pp. 452–453   b. value added taxes (VAT)
              c. product differentiation
              d. duties and tariffs
              e. fluctuating exchange rates

12-65         In 1984, the relative value of the yen to the dollar was ¥240 = $1. By 1993, the
a             yen had strengthened to ¥100 = $1. If Japanese exporters wanted to preserve
Hard          profit margins on goods sold in the United States in 1993, they would have had to:
p. 454        a. raise prices in dollars
              b. switch to cost-based pricing
              c. adopt a policy of market penetration
              d. lower prices in dollars

12-66         Which of the following would not be used by an exporter with a weak home
d             country currency:
Hard          a. expand product line and add more costly features
p. 455        b. speed repatriation of foreign-earned income
              c. buy advertising, insurance, and other services in home country market
              d. shift sourcing outside home country market

12-67         In the late 1980s, retailers in Latin America invested in computer systems for
d             tracking and managing inventory. This action was a response to:
Med           a. dumping by foreign retailers
p. 458        b. the thriving black market
              c. a flood of gray market goods
              d. severe inflation

12-68         Suppose a company selling in various country markets makes statements such as
a             “we know what the customer wants, and he or she will have to pay for it.” This is
Med           an indication of a(n) ______________ approach to setting prices.
pp. 459–461   a. ethnocentric
              b. polycentric
              c. regiocentric
              d. geocentric

12-69         According to a recent study of European industrial exporters, companies that
b             utilized independent distributors would be most likely to utilize:
Hard          a. ethnocentric pricing
pp. 459–461   b. polycentric pricing
              c. regiocentric pricing
              d. geocentric pricing

12-70         Which automaker was described in Chapter 12 as using an ethnocentric approach
d             to setting prices in the United States:
Hard          a. Toyota
pp. 460–461   b. Nissan
              c. Volkswagen
              d. Mercedes

12-71         Which of the following pricing strategies recognizes both local market differences
c             and the importance of headquarters input into pricing decisions:
Hard          a. ethnocentric pricing
pp. 460–461   b. polycentric pricing
              c. geocentric pricing
              d. rigid cost-plus pricing

12-72         Which of the following would not be taken into account by a company using an
e             ethnocentric approach to pricing decisions:
Hard          a. the possibility of implementing a penetration strategy
pp. 460–461   b. profitable price points that could be tied to local sourcing as opposed to home-
              country sourcing
              c. integration of price with other marketing mix elements
              d. factors unique to individual country markets
              e. none of the above would be taken into account by a company using
              ethnocentric pricing

12-73         If a company decided to set the export price for a particular product at an amount
a             equivalent to the home country price, it would be using which approach to
Easy          pricing:
pp. 460–461   a. ethnocentric
              b. polycentric
              c. regiocentric
              d. geocentric

12-74         The unauthorized distribution of trademarked goods to exploit price differentials
c             in world markets is known as:
Easy          a. market skimming
p. 463        b. black marketing
              c. gray marketing
              d. dumping
              e. licensing

12-75         Suppose that a manufacturer of golf equipment sells a golf club to its domestic
a             distributor for $200; it sells the same club to a distributor in Asia for $100.
Easy          Although it is not authorized to do so, the Asian distributor resells the club to a
p. 463        retailer in the United States for $150. This type of behavior is known as:
              a. gray marketing
              b. dumping
              c. market skimming
              d. offsets

12-76         An enterprising wine lover notes that French champagne is priced lower in Paris
a             than it is in London. If this individual can arrange to purchase a large quantity of
Med           champagne in France and transport it to London for resale at prices that undercut
p. 463        those offered by authorized distributors, he or she can be said to engage in:
              a. gray marketing
              b. skimming the market
              c. black marketing
              d. price escalation marketing

12-77         When Tag Heuer, a marketer of luxury watches, takes out newspaper ads urging
d             consumers to purchase Tag Heuer products from authorized dealers only, the
Med           company is attempting to combat the _______________ problem.
p. 464        a. countertrade
              b. market holding
              c. price escalation
              d. gray market
              e. market skimming

12-78         In the early 1990s, the U.S. International Trade Commission ruled that several
d             Japanese manufacturers were selling active-matrix flat panel display screens in
Med           the United States at less than fair value and thereby injuring the sole U.S.
p. 465        producer of similar screens. The ITC’s ruling concerned:
              a. black marketing
              b. market skimming
              c. gray marketing
              d. dumping
              e. licensing

12-79         If a company sells products in export markets at prices that are below fair market
d             value and that can harm producers in the export market, that company may be
Med           accused of:
p. 465        a. market skimming
              b. using offsets
              c. pursuing artificially high margins
              d. dumping

12-80         Following the 1997 currency crisis in Asia, which American industry appealed to
c             President Clinton for protection from foreign producers that were allegedly
Med           “dumping” products in the United States:
pp. 465–467   a. auto industry
              b. computer industry
              c. steel industry
              d. photo products industry

12-81         “Transfer pricing” refers to pricing decisions for:
c             a. all international sales
Med           b. international sales between two nonrelated companies
p. 467        c. intracorporate sales
              d. company sales to government agencies

12-82         “Creative” use of transfer pricing by global companies:
b             a. is encouraged by host-country governments
Med           b. can keep profits low in certain country subsidiaries
p. 467        c. always involves the “cost plus” approach
              d. ensures that a company pays its fair share of taxes

12-83         “Cost-based,” “market-based,” and “negotiated” are three approaches to:
c             a. dumping
Med           b. gray marketing
pp. 467–468   c. transfer pricing
              d. price skimming

12-84         Recent trade data indicate that about 25 percent of U.S. merchandise exports
c             represent shipments by American companies to their foreign affiliates and
Med           subsidiaries. This situation underscores the importance of _______________ in
p. 468        global marketing.
              a. dumping
              b. gray marketing
              c. transfer pricing
              d. price skimming

12-85         The main purpose of Section 482 of the United States Internal Revenue Code is
a             to:
Med           a. prevent tax avoidance by global companies
pp. 468–469   b. lower prices in global markets
              c. discourage dumping
              d. put an end to status quo pricing

12-86         Which of the following is true about proper use of the term “countertrade”:
d             a. The term “countertrade” is interchangeable with “offsets.”
Med           b. The term “countertrade” is interchangeable with “barter.”
pp. 470–472   c. The term “countertrade” is interchangeable with “counterpurchase.”
              d. “Countertrade” is a blanket term that refers to several different types of business

12-87         The most general term for the global phenomenon involving reciprocal business
e             interactions between parties in various countries is known as:
Med           a. switch trading
pp. 470–472   b. barter
              c. offset
              d. compensation trading
              e. countertrade

12-88         Which of the following has views about global trade that clash fundamentally with
a             views shared by the other three:
Med           a. Paul Krugman
p. 471        b. Lester Thurow
(Sidebar)     c. Robert Reich
              d. Ira Magaziner

12-89         Which of the following statements does not represent the views of economist Paul
e             Krugman:
Med           a. “America is part of a truly global economy.”
p. 471        b. “America competes in the global economy.”
              c. “Improved productivity in other countries reduces America’s competitiveness.”
              d. “The U.S. government should spend more to enhance U.S. competitiveness.”
              e. None of these is consistent with Krugman’s views.

12-90         In the 1970s and 80s, the arrangement by which PepsiCo received payment for soft
b             drink products sold to the Soviet Union was:
Med           a. switch trading
pp. 472–473   b. barter
              c. offset
              d. compensation trading

12-91         The direct exchange of goods or services between parties in lieu of monetary payment
a             is known as:
Med           a. barter
p. 472–473    b. switch trading
              c. offset
              d. compensation trading

12-92         In which country or geographic area are trading partners most likely to require
b             countertrade deals:
Med           a. the United States
pp. 472–473   b. Central and Eastern Europe
              c. Western Europe
              d. Japan

12-93         Which of the following forms of countertrade does not require use of money or credit
a             between parties:
Med           a. barter
pp. 472–473   b. switch trading
              c. offset
              d. compensation trading

12-94         Which type of countertrade arrangement is required by governments seeking to reduce
c             the budgetary impact of expenditures for defense or telecommunications:
Med           a. barter
pp. 473–474   b. switch trading
              c. offset
              d. compensation trading

12-95         To win a contract to supply the United Kingdom with AWACS military aircraft,
d             Boeing agreed to purchase products from the UK whose value was equivalent to 130
Med           percent of the contract. This type of export deal is known as:
pp. 473–474   a. barter
              b. switch trading
              c. compensation trading
              d. offset

12-96    Suppose that World Corp signs a contract to build a lumber processing plant in Siberia.
d        If World Corp signs a second contract agreeing to take partial payment for the plant in
Hard     the form of lumber products produced at the plant, it is engaging in:
p. 475   a. barter
         b. switch trading
         c. offset
         d. compensation trading
         e. a hybrid countertrade arrangement

12-97    When one of the parties to a barter transaction is not willing to accept the goods
a        included in the transaction, that party is likely to utilize the services of a:
Med      a. switch trader
p. 475   b. Foreign Trade Organization
         c. Foreign Sales Corporation
         d. Mittelstand owner

12-98    A German company that wishes to invest in Mexico is told by the Mexican government
a        that approval of the proposal is contingent on the company’s willingness to export.
Med      This is an example of:
p. 475   a. a hybrid countertrade arrangement
         b. barter
         c. switch trading
         d. compensation trading

12-99    Which of the following does not refer to a three-way countertrade deal involving an
d        exporter from an industrialized country, an importer in a developing country, and a
Hard     third country that eventually compensates the original exporter:
p. 475   a. switch trading
         b. triangular trade
         c. swap
         d. offset

12-100   Which of the following companies would be most likely to use some form of
b        countertrade when selling its products in developing countries:
Med      a. Procter & Gamble
p. 475   b. Bell Helicopter Textron
         c. Nokia
         d. Mercedes-Benz
         e. Coca-Cola


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