Customer country and competitor

country features
Professor Daniel F. Spulber
2
Customer preferences
Elasticity of demand
Income per capita and income distribution
Customer knowledge
Distribution infrastructure
Society and culture
Political, legal and regulatory climate
Predict effect on earnings and choose target
countries
Customer country features
Distribution and sales
3
Home country: Compare advantages and disadvantages
Customer countries footprint: Global or local
competitor
Supplier countries: Global or local manufacturing and
procurement
Partner countries: Complementary products,
technologies, capabilities
Political, legal and regulatory climate compare effects
trade agreements, home-country policies
Competitor countries
Evaluation of competitive advantage
4
Tailor products and pricing
Emerging market trend of Sachet Marketing
Recognizes low income of mass of consumers and
tailors offerings 2/3 of world population makes
$1,500 or less per year
Affordable sizes and products
Maintain quality and extend appeal of brands

See reading on-line: Four Billion Customers

(trendwatching.com, 2005)
5
Low-cost branded products
Unilever Ala low-income laundry detergent
brand sold in Brazil

Microtravel appeal of sachets to travelers of
all income levels

Whirlpool low-cost washing machines in
China and India (less than $200)

Nokia 1100 -- popular in rural India
6
Customer country features
Elasticity of demand
Elasticity of excess demand faced by the firm has two
components:

Price responsiveness of firms customers:
Market demand elasticity

Price responsiveness of firms competitors:
Competitor supply elasticity
7

Elasticity of Demand:
Price Responsiveness of Customers
Different across countries:

Consumer tastes and incomes differ

Consumer knowledge of goods and services differs

Past consumption patterns affects switching costs:
Installed base of product and competing products differ
8
Elasticity of Demand:
Price Responsiveness of Competitors
Different across countries:

Different labor supply elasticities

Different operating costs across countries

Extent of domestic competition among suppliers differs
due to trade barriers and domestic regulations

Experience and technology of suppliers differs
9
Do you think that Coca-Cola prices will differ?
10
11
12
Elastic Demand if E > 1
Example 1
Price increase from 10 to
11, that is 10%
Suppose quantity sold falls
from 200 to 160 units, that
is 20%
E = 20/10 = 2
Inelastic Demand if E < 1
Example 2
Price increase from 10 to 11,
10%
Suppose quantity sold falls
from 200 to 190 units, that is
5%
E = 5/10 =
Elasticity of Demand
The percentage change in
quantity sold divided by the
percentage change in price
P P
Q Q
E
/
/
A
A
=
13
Revenue Effects of the Two Examples

P1

P2

Change
in P

Q1

Q2

Change
in Q

R1

R2

Chan
ge in
R

10

11

10%

200

160

20%

2000

1760

(240)

10

11

10%

200

190

5%

2000

2090

90


Inelastic Demand: E =
Elastic Demand: E= 2
14
Elasticity of demand: Optional Review
Revenue:
R = P Q
Marginal revenue -- change in revenue per unit
change in output:
MR = P + QP/Q
= P(1 + (Q/Q)(P/P))
So,
MR = P(1 1/E).

Consumer benefit if elasticity is a constant: B(Q) = Q
(E 1)/E
.
15
Revenue effects
Observe that marginal revenue is less than the price.

MR = P(1 1/E).

This is because raising the price affects revenue in
two ways:
More is earned per unit sold
fewer units are sold
The relative influence of these two effects is
measured by the elasticity
16
Revenue effects
If the elasticity of demand is greater than one, a
price increase lowers revenue (a price cut increases
revenue)
If elasticity of demand is less than one, a price
increase also increases your revenue (and a price
drop cuts your revenue)

Managers should try to estimate elasticity of demand
numbers (formally or informally) in pricing across
different countries
17
Pricing by a firm with market power: Review
D(P)
Q
MR
P
M
MC
P
C
P

Q
M
Q
C

P
M
(1 1/E) = MC.

18
Pricing to market
Prices to satisfy the profit-maximizing conditions in each
country:





P
A
, P
F
= Prices in country A and F
E
A
, E
F
= Price elasticities of demand in country A and F
MC = Marginal Cost

.
1
1 MC
E
P
A
A
=
|
.
|

\
|

.
1
1 MC
E
P
F
F
=
|
.
|

\
|

19
Pricing to market

At the Zara stores, price
tags stated in many
currencies and for multiple
countries.
20
Pricing to market
21
Pricing to market
Advantages of Uniform Pricing
Consistent pricing across
countries
Lowers transaction costs
Avoids gray market arbitrage
Avoids customer complaints
Global product:: standardize
marketing, sales, product
features
Problem: dealing with
exchange rate fluctuations
Advantages of Pricing to Market
Meet or beat local competition
Price leader or product
differentiation strategies may
differ by market served
Maximize profit by market
segment
Tailoring marketing, sales,
service and product features to
local market
22
Limits on Pricing to Market
Legal restrictions on price discrimination, most-favored-
nation agreements

Limited legal protections for original seller allow gray market
arbitrage

Low trade costs allow arbitrage: Price difference must be less
than cost of trade between countries A and F to avoid
arbitrage:


Differences in the elasticity of demand (responsiveness of
demand to price changes) must be large enough to justify
different prices in different markets
T P P
F A
<
23
Markups in the European Car Industry
Verboven (1996):
Studies 5 European
countries
Estimates relative markups
Looks at the wholesale
level
Estimates elasticities for
different groups of cars
Recall the price equations:




Rewrite as relative markup:
.
1
1 MC
E
P
A
A
=
|
.
|

\
|

( )
.
1
A A
A
E P
MC P
=

24
Markups in the European Car Industry
Consider markup equation at the wholesale level
Customers are dealers, sellers are the manufacturers




P
ij
: wholesale price in market i for model j
MC
ij
: Marginal cost in market i for model j
Table 3: Relative markups for selected cars
Example (100 95)/100 = 0.05 = 5 % = 1/20.
( )
.
1
ij ij
ij ij
E P
MC P
=

25
Markups in
the
European
Car
Industry
26
Markups in the European Car Industry
Lerner Index:


Elasticity of demand E
ik
is for market i and car model in
segment k

Example:
E = 20 (elastic demand)
L = 1/20 = 0.05 = 5 %

With the exception of Italy, Lerner indices increase with the
class of models
.
1
ik
E
L =
27
Markups in the European Car Industry
Verboven (1996):
Finds that price discrimination follows the Lerner-indices,
that is price discrimination follows demand elasticities

Degree of price discrimination is more pronounced the lower
the class - it is greater on smaller models!

Note that Italys lower elasticities (higher Lerner-indices)
reflect FIAT market power and high import quota restrictions
28
Markups in the European Car Industry
29
Markups in the European Car Industry
Verboven (1996) concludes:
Domestic car companies are able to exploit domestic market
power in lower segments

Import quotas have stronger effects on smaller and
inexpensive cars than on large and expensive cars

The degree of price discrimination is more pronounced the
lower the class
30
Summary and take-away points
Managers should perform target country analysis to estimate
customer demand elasticity and competitor supply response

Pricing to market based on differences in demand elasticities
across countries, reflects customer country demand and
competitor supply responses

International business managers should weigh benefits and
costs of uniform pricing versus pricing to market

Lower costs of trade tend to enforce uniform pricing