Explain why and how a firm’s pricing strategy might vary among countries.
International pricing strategy is an important component of the overall international marketing mix.19 This section looks at three aspects of international pricing strategy. First, we examine the case for pursuing price discrimination, charging different prices for the same product in different countries. Second, we look at what might be called strategic pricing. Third, we review regulatory factors, such as government-mandated price controls and antidumping regulations, that limit a firm’s ability to charge the prices it would prefer in a country.
Price discrimination exists whenever consumers in different countries are charged different prices for the same product, or for slightly different variations of the product.20 Price discrimination involves charging whatever the market will bear; in a competitive market, prices may have to be lower than in a market where the firm has a monopoly. Price discrimination can help a company maximize its profits. It makes economic sense to charge different prices in different countries.
Two conditions are necessary for profitable price discrimination. First, the firm must be able to keep its national markets separate. If it cannot do this, individuals or businesses may undercut its attempt at price discrimination by engaging in arbitrage. Arbitrage occurs when an individual or business capitalizes on a price differential for a firm’s product between two countries by purchasing the product in the country where prices are lower and reselling it in the country where prices are higher. For example, many automobile firms have long practiced price discrimination in Europe. A Ford Escort once cost $2,000 more in Germany than it did in Belgium. This policy broke down when car dealers bought Escorts in Belgium and drove them to Germany, where they sold them at a profit for slightly less than Ford was selling Escorts in Germany. To protect the market share of its German auto dealers, Ford had to bring its German prices into line with those being charged in Belgium. Ford could not keep these markets separate.
However, Ford still practices price discrimination between Great Britain and Belgium. A Ford car can cost up to $3,000 more in Great Britain than in Belgium. In this case, arbitrage has not been able to equalize the price, because right-hand-drive cars are sold in Great Britain and left-hand-drive cars in the rest of Europe. Because there is no market for left-hand-drive cars in Great Britain, Ford has been able to keep the markets separate.
The second necessary condition for profitable price discrimination is different price elasticities of demand in different countries. The price elasticity of demand is a measure of the responsiveness of demand for a product to change in price. Demand is said to be elastic when a small change in price produces a large change in demand; it is said to be inelastic when a large change in price produces only a small change in demand. Figure 16.2 illustrates elastic and inelastic demand curves. Generally, a firm can charge a higher price in a country where demand is inelastic.
Price Elasticity of Demand
A measure of how responsive demand for a product is to changes in price.
When a small change in price produces a large change in demand.
When a large change in price produces only a small change in demand.
FIGURE 16.2 Elastic and Inelastic Demand Curves
The elasticity of demand for a product in a given country is determined by a number of factors, of which income level and competitive conditions are the two most important. Price elasticity tends to be greater in countries with low income levels. Consumers with limited incomes tend to be very price conscious; they have less to spend, so they look much more closely at price. Thus, price elasticity for products such as personal computers is greater in countries such as India, where a PC is still a luxury item, than in the United States, where it is now considered a necessity. The same is true of the software that resides on those PCs; thus, to sell more software in India, Microsoft has had to introduce low-priced versions of its products into that market, such as Windows Starter Edition.
In general, the more competitors there are, the greater consumers’ bargaining power will be and the more likely consumers will be to buy from the firm that charges the lowest price. Thus, many competitors cause high elasticity of demand. In such circumstances, if a firm raises its prices above those of its competitors, consumers will switch to the competitors’ products. The opposite is true when a firm faces few competitors. When competitors are limited, consumers’ bargaining power is weaker and price is less important as a competitive weapon. Thus, a firm may charge a higher price for its product in a country where competition is limited than in one where competition is intense.