International Price Discrimination


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It is all about Price discrimination, International price discrimination and dumping..

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International Price Discrimination

  1. 1. International price discrimination Pharmaceutical companies may charge customers living in wealthier countries (such as the United States) a much higher price than for identical drugs in poorer nations, as is the case with the sale of anti-retroviral drugs in Africa. Since the purchasing power of African consumers is much lower, sales would be extremely limited without price discrimination. The ability of pharmaceutical companies to maintain price differences between countries is often reinforced by national drugs laws and regulations. (or lack thereof) Another example is textbooks. Publishers such as Prentice Hall and Pearson have low cost editions of textbooks for countries such as India. The textbooks are often printed on cheaper paper, are paperbacks and priced at 15-20% of the dollar price. This pricing has largely eliminated the practice of photo copying these books. Although not common in modern times, governments have traditionally raised revenues from tariffs. When these are not flat tariffs, the government effectively sets the prices of goods that are not produced locally and are only imported. Even online sales for non material goods, which do not have to be shipped, may change according to the geographic location of the buyer. A song in Apple's iTunes costs 79 pence (1.49 USD) for Britons but only 99 cents for Americans. (~50% more for the same song) These differences may arise because of changes in exchange rates that occur much more frequently than changes in prices, or they may arise because the license-holders (in this case, record companies) are enforcing their existing pricing policy on new licensees or intermediaries. 1. D U M P I N G 2. o Often, dumping is mistaken and simplified to mean cheap or low priced imports. However, it is a misunderstanding of the term. o On the other hand, dumping, in its legal sense, means export of goods by a country to another country at a price lower than its normal value. Definition 3. o Persistent Dumping - Dumping resulting from international price discrimination. o Predatory Dumping - is the ‘ temporary’ sale of a commodity at below cost or at a lower price abroad in order to drive foreign producers out of business, after which prices are raised abroad to take advantage of the newly acquired monopoly power. Forms of Dumping
  2. 2. 4. o Sporadic Dumping – It is the ‘ occasional’ sale of the commodity at below cost or at a lower price abroad than domestically in order to unload an unforeseen and temporary surplus of a commodity without having to reduce domestic prices. 5. o Dumping can harm the domestic industry by reducing its sales volume and market shares, as well as its sales prices. This in turn can result in decline in profitability, job losses and, in the worst case, in the domestic industry going out of business. o Anti dumping is a measure to rectify the situation arising out of the dumping of goods and its trade distortive effect. Effects 6. o The purpose of anti dumping duty is to rectify the trade distortive effect of dumping and re-establish fair trade. The use of anti dumping measure as an instrument of fair competition is permitted by the WTO. o So, anti dumping is an instrument for ensuring fair trade and is not a measure of protection for the domestic industry. Anti D u m p i n g 7. o If the domestic industry is able to establish that it is being injured by the dumping, then antidumping duties are imposed on goods imported from the dumpers' country at a percentage rate calculated to counteract the dumping margin. o Advocates of free markets see "dumping" as beneficial for consumers and believe that protectionism to prevent it would have net negative consequences. 8. o There are different ways of calculating whether a particular product is being dumped heavily or only lightly. The agreement narrows down the range of possible options. It provides three methods to calculate a product’s “normal value”. o The main one is based on the price in the exporter’s domestic market. Investigation & Litigation 9. o When this cannot be used, two alternatives are available — the price charged by the exporter in another country, o Or a calculation based on the combination of the exporter’s production costs, other expenses and normal profit margins. 10. o Anti-dumping investigations are to end immediately in cases where the authorities determine that the margin of dumping is insignificantly small (defined as less than 2% of the export price of the product).
  3. 3. o Other conditions are also set. For example, the investigations also have to end if the volume of dumped imports is negligible i.e. if the volume from one country is less than 3% of total imports of that product. 11. o Although investigations can proceed if several countries, each supplying less than 3% of the imports, together account for 7% or more of total imports. 12. o Japan was accused of dumping steel, television sets, and computer chips in the United States, and Europeans of dumping cars, steel and other products. o Most industrial nations (especially those of European union) have tendency of persistently dumping surplus agricultural commodities arising from their farm support programs. Two Necessary Conditions for Price Discrimination There are two conditions that must be met if a price discrimination scheme is to work. First the firm must be able to identify market segments by their price elasticity of demand and second the firms must be able to enforce the scheme.[3]For example, airlines routinely engage in price discrimination by charging high prices for customers with relatively inelastic demand - business travelers - and discount prices for tourist who have relatively elastic demand, The airlines enforce the scheme by making the tickets non-transferable thus preventing a tourist from buying a ticket at a discounted price and selling it to a business traveler (arbitrage). Airlines must also prevent business travelers from directly buying discount tickets. Airlines accomplish this by imposing advance ticketing requirements or minimum stay requirements conditions that it would be difficult for average business traveler to meet. Determination of the prices depends internal and external factors. Pricing goals represents internal policy. Also, price policy should be aligned on several other factors.
  4. 4. Demand is the key determinant for market oriented company. Demand is the starting point for all activities. Simply, the average customer will be demanding different product quantities, depending on price. Law of the market says that demand and price are counter proportional ( price increase leads to demand decrease and vice versa ). Competition has a significant influence to price determination of market oriented companies. Prices need to be adjusted in order to address the competition. Every company should research market and competition, prior to launch of the new product. Survey should include direct competitors but also the substitutes. Based on market survey and the strength of the company the prices can be the same, lower or higher. Costs – While demand and competition are external factor, the costs are internal. The costs must be embedded in every stage of price determination process. There are several methods of cost embedding into price: 1.) Costs Plus – company calculates the costs and increase price for the specific profit. 2.) Markup – price based on cost increased for amount of specific markup percentage. 3.) Target Return Method – calculated required markup, in order to achieve return on investment. 4.) Profit Maximizing is the price where the marginal profit equals marginal cost. 5.) Breakeven Analysis – is the number of units sold that generates profit that can cover cost. This point does not have profit nor lost. Life Cycle pricing approach analysis the current phase of product life in market. 1.) Entering phase usually requires higher sales prices in order to payback initial development costs. Also customers are willing to pay more for a new product. 2.) Growth phase is bringing the market stabilization. Prices are more or less stabile. 3.) Saturation phase leads to price decline, due to competition entrance and loss of consumer's interest 4.) Declining phase is the last part of product life cycle. Prices are still going down. Sales Channels have the different shopping occasion. Consequently the pricing is adjusted to sales channel. For example, the same products is cheaper in hypermarket than on petrol station. Government is usually do not interfere into price determination. Exceptionally it may limit maximal prices for a certain products. Still, government is influencing pricing, since the taxes & custom duties are the part of the price.
  5. 5. Price discrimination exists when sales of identical goods or services are transacted at different prices from the same provider. In general, the practice of charging different customers different prices is called price discrimination.[1] In a theoretical market with perfect information,perfect substitutes, and no transaction costs or prohibition on secondary exchange (or re-selling) to prevent arbitrage, price discrimination can only be a feature of monopolistic and oligopolistic markets[2], where market power can be exercised. Otherwise, the moment the seller tries to sell the same good at different prices, the buyer at the lower price can arbitrage by selling to the consumer buying at the higher price but with a tiny discount. However, product heterogeneity, market frictions or high fixed costs (which make marginal-cost pricing unsustainable in the long run) can allow for some degree of differential pricing to different consumers, even in fully competitive retail or industrial markets. Price discrimination also occurs when the same price is charged to customers which have different supply costs. The effects of price discrimination on social efficiency are unclear; typically such behavior leads to lower prices for some consumers and higher prices for others. Output can be expanded when price discrimination is very efficient, but output can also decline when discrimination is more effective at extracting surplus from high-valued users than expanding sales to low valued users. Even if output remains constant, price discrimination can reduce efficiency by misallocating output among consumers. Price discrimination requires market segmentation and some means to discourage discount customers from becoming resellers and, by extension, competitors. This usually entails using one or more means of preventing any resale, keeping the different price groups separate, making price comparisons difficult, or restricting pricing information. The boundary set up by the marketer to keep segments separate are referred to as a rate fence. Price discrimination is thus very common in services, where resale is not possible; an example is student discounts at museums. Price discrimination can also be seen where the requirement that goods be identical is relaxed. For example, so-called "premium products" (including relatively simple products, such as cappuccino compared to regular coffee) have a price differential that is not explained by the cost of production. Some economists have argued that this is a form of price discrimination exercised by providing a means for consumers to reveal their willingness to pay.