Chapter 11 Pricing Decisions: Global Marketing, 6e (Keegan/Green)

Global Marketing, 6e (Keegan/Green)
Chapter 11 Pricing Decisions
1) Price floor and price ceiling are two basic factors which determine the boundaries within
which prices should be set.
Answer: TRUE
Diff: 1 Page Ref: 330- 331
2) Price can be used as a strategic variable to achieve specific goals, including ROI, profit, and
rapid recovery of product development costs.
Answer: TRUE
Diff: 2 Page Ref: 332
AACSB: Analytic Skills
3) The market skimming pricing strategy is a part of a deliberate attempt to reach a market
segment that is willing to pay a premium price for a particular brand or for a specialized or
unique product.
Answer: TRUE
AACSB: Reflective Thinking
4) "Market skimming" is a strategy that uses low prices as a competitive weapon to gain market
position.
Answer: FALSE
5) The skimming pricing strategy is appropriate in the mature phase of the product life cycle.
Answer: FALSE
6) When Apple introduced iPhone in the United States in the summer of 2007 with a sale price of
$ 599 it used skimming pricing strategy.
Answer: TRUE
7) Price can be used as a competitive weapon to gain or maintain market position.

Answer: TRUE
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8) A market penetration pricing strategy calls for setting price levels that are high enough to
quickly build market share.
Answer: FALSE
9) Penetration prices often mean that the product may be sold at a loss for a certain period of
time.
Answer: TRUE
10) Sony used penetration pricing when it launched the Walkman personal stereo in 1979.
Answer: TRUE
11) Hewlett-Packard is the world's leading marketer of inkjet printers. H-P's printers are priced
very low and margins are slim; by contrast, the company enjoys healthy margins on sales of
replacement ink cartridges. This approach is sometimes known as "razors and blades" pricing.
Answer: TRUE
Diff: 2 Page Ref: 333-334
12) Toyota, Sony, Olympus, and Komatsu are some of the well-known Japanese companies that
use target costing, a process which is also known as "design to cost."
Answer: TRUE
13) Vodaphone, AT&T and other cellular service providers buy handsets at prices set by
Motorola, Nokia, and other manufacturers, and then subsidize the cost by offering significant
discounts.
Answer: TRUE
14) If the terms of trade for an export transaction specify "ex-works," the exporter/seller pays all
expenses incurred until the product is delivered to the importer/buyer's warehouse.
Answer: FALSE
15) To protect against possible losses from currency exchange rates, exporters add a charge
known as "CIF" to the ex-works price of most export shipments.
Answer: FALSE
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16) With a free on board (FOB) named port, the responsibility and liability of the seller ends at
the docking point at the port.
Answer: FALSE
17) Currency fluctuations mean that companies doing business in global markets should
regularly review prices and make adjustments when conditions dictate.
Answer: FALSE
18) Suppose the Japanese yen is weak in relation to the U.S. dollar. Japanese firms should be
able to stress price benefits for products exported to the U.S.
Answer: TRUE
19) Suppose the Japanese yen is weak in relation to the U.S. dollar. Rather than stressing price
benefits, Japanese companies exporting to the U.S. should emphasize quality improvements and
after-sales service.
Answer: FALSE
20) Within the Euro zone price transparency means that buyers will be able to comparison shop
easily because goods are priced in euros as opposed to marks, francs, or lira.
Answer: TRUE
21) When domestic currency is weak, it is advisable to speed repatriation of foreign-earned

income and collections.
Answer: TRUE
22) When domestic currency is strong, expenditures in the local (host country) should be
minimized.
Answer: FALSE
23) When domestic currency is weak, it is advisable to bill foreign customers in the domestic
currency.
Answer: FALSE
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24) Improved price transparency in the Euro zone leads to greater price disparities.
Answer: FALSE
25) In countries where high inflation is the rule, companies should make price adjustments to
maintain operating margins.
Answer: TRUE
26) Louis Vuitton executives raised prices in 2008 and sales continued to increase.
Answer: TRUE
27) Germany has traditionally severely restricted competition in a number of industries.

Answer: TRUE
28) The video piracy problem is not confined to emerging markets. In the United States, losses
from piracy exceed $1 billion each year for the movie industry as a whole.
Answer: TRUE
29) In some instances, deregulation represents a quid pro quo that will allow German companies
wider access to other country markets.
Answer: TRUE
30) The open-skies agreement between the United States and Germany would allow Lufthansa to
fly more routes within the United States.
Answer: TRUE
31) In the United States, Levi Strauss & Company has to face competitive behavior since
JCPenny and Sears are both aggressively marketing their own brands.
Answer: TRUE
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32) Marketers of domestically manufactured finished products may be forced to switch to
offshore sourcing of certain components to keep costs and prices competitive.
Answer: TRUE
33) Dieter Zietsche, sales chief at Germany's Mercedes-Benz, once said that, in setting prices,
"We know what the customer wants, and he will have to pay for it." This is an example of an
ethnocentric pricing policy.
Answer: TRUE
34) When subsidiary country managers are given broad discretion to set prices in their markets, a
polycentric pricing strategy is in evidence.
Answer: TRUE
35) In global marketing, there is no such thing as a "normal" margin for pricing.
Answer: TRUE
36) The terms "parallel importing" and "gray marketing" mean the same thing.
Answer: TRUE
37) A global company that uses market skimming as a pricing strategy is likely to invite charges
of "dumping" by competitors in host-country markets.
Answer: FALSE
38) According to current GATT standards, governments cannot penalize foreign companies for
dumping if the export price of a given product differs from the domestic price by less than 2
percent.
Answer: TRUE
39) Transfer pricing is a term that applies to transactions between different divisions or units of
the same company.
Answer: TRUE
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40) Lockheed and other military aircraft marketers are likely to face requests for offsets before
closing a sale in the Middle East.
Answer: TRUE
41) Which pricing strategy would be most appropriate for a marketer of luxury designer brands?
A) gray market
B) skimming
C) penetration
D) market holding
E) cost based
Answer: B
42) If the manufacturer of a sophisticated new consumer electronics product determines that
many target consumers qualify as "innovators" and "early adopters" with relatively inelastic
demand curves, the company should use the ________ pricing strategy:
A) gray market
B) skimming
C) penetration
D) market holding
E) cost based
Answer: B
43) Which pricing strategy did Sony use when launching the Walkman personal stereo?
A) gray marketing
B) skimming
C) penetration
D) market holding
E) cost based
Answer: C
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44) In India, consumers do not like to be locked in to long-term contracts and Apple distributes
its iPhone exclusively through stores operated by Airtel, an India carrier, and Vodaphone. This is
an example of:
A) gray market.
B) price bundling.
C) market skimming.
D) razors and blades.
E) cost-based.
Answer: D
45) Excelsior Corp. launches a new hand-held personal digital assistant (PDA) for busy
corporate executives. The initial retail price is set at $699. One year later, in an effort to reach a
broader market, the price is lowered to $299. Which of the 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
Answer: A
46) A firm without much export experience uses the rigid cost-based pricing method. Which of
the following considerations is the exporter ignoring?
A) Is the price competitive in view of local market conditions?
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
Answer: E
47) Which pricing strategy has the advantage of being simple to calculate but the disadvantage of
ignoring demand and competitive conditions?
A) gray marketing
B) skimming
C) penetration
D) market holding
E) cost based
Answer: E
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48) Which of the following incoterms apply to all modes of transportation?
A) ex-works
B) FAS
C) delivered duty paid
D) FOB
E) both A and C
Answer: E
49) A manufacturer attempting to set prices for its products in export markets must realize that
CIF, VAT, and distributor markup all lead to:
A) currency devaluations.
B) dumping charges.
C) market skimming.
D) price escalation.
E) market penetration.
Answer: D
50) If a distributor's margins are based on the "landed" price of an import shipment, they will be
based on:
A) ex-works price.
B) transportation costs.
C) insurance costs.
D) VAT.
E) all of the above
Answer: E
51) Which of the following does not contribute to price escalation in global marketing?
A) shipping and insurance charges
B) value added taxes (VAT)
C) different Incotherms as incentives
D) duties and tariffs
E) fluctuating exchange rates
Answer: C
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52) In July 2001, the euro's value relative to the dollar was about 1.00 = $0.85. By November
2009 the euro had strengthened to 1.00 = $1.48. All other things being equal, if a European-
based global company wants to preserve margins for goods exported to the U.S. market, the
company should:
A) raise prices in dollars.
B) switch to cost-based pricing.
C) adopt a policy of market penetration pricing.
D) reduce prices in dollars.
E) use skimming pricing.
Answer: A
53) Which of the following would not be used by an exporter with a weak home country
currency?
A) Expand product line and add more costly features.
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.
E) Exploit marketing opportunities in all markets..
Answer: D
54) Suppose a company selling in various country markets makes statements such as "we know
what the customer wants, and he or she will have to pay for it." This is an indication of a(n)
________ approach to setting prices.
A) ethnocentric
B) polycentric
C) regiocentric
D) geocentric
E) adaptation
Answer: A
55) According to a recent study of European industrial exporters, companies that utilized
independent distributors would be most likely to utilize:
A) ethnocentric pricing.
B) polycentric pricing.
C) regiocentric pricing.
D) geocentric pricing.
E) extension pricing.
Answer: B
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56) Which automaker was described as using an ethnocentric approach to setting prices in the
United States?
A) Toyota
B) Nissan
C) Volkswagen
D) Mercedes
E) Lexus
Answer: D
57) Which of the following pricing strategies recognizes both local market differences and the
importance of headquarters input into pricing decisions?
A) ethnocentric pricing
B) polycentric pricing
C) geocentric pricing
D) rigid cost-based pricing
E) extension pricing
Answer: A
58) Which of the following would NOT be taken into account by a company using an
ethnocentric approach to pricing decisions?
A) the possibility of implementing a penetration strategy
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
Answer: E
59) If company managers decide to set the export price for a particular product at an amount
equivalent to the home country price, they would be using which approach to pricing?
A) ethnocentric
B) polycentric
C) regiocentric
D) geocentric
E) extension pricing
Answer: A
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60) The unauthorized distribution of trademarked goods to exploit price differentials in world
markets is known as:
A) market skimming.
B) black marketing.
C) gray marketing.
D) dumping.
E) licensing.
Answer: C
61) When Tag Heuer, a marketer of luxury watches, takes out newspaper ads urging consumers
to purchase Tag Heuer products from authorized dealers only, the company is most likely
attempting to combat the ________ problem.
A) countertrade
B) market holding
C) price escalation
D) gray market
E) market skimming
Answer: D
62) In the early 1990s, the U.S. International Trade Commission ruled that several Japanese
manufacturers were selling active-matrix flat panel display screens in the U.S. at less than fair
value and thereby injuring the sole U.S. producer of similar screens. The ITC's ruling concerned:
A) black marketing.
B) market skimming.
C) gray marketing.
D) dumping.
E) licensing.
Answer: D
63) Following the 1997 currency crisis in Asia, which American industry appealed to President
Clinton for protection from foreign producers that were allegedly "dumping" products in the
United States:
A) auto industry.
B) computer industry.
C) steel industry.
D) photo products industry.
E) restaurant industry.
Answer: C
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64) If a company sells products in export markets at prices that are below fair market value and
that can harm producers in the export market, that company may be accused of:
A) market skimming.
B) using offsets.
C) pursuing artificially high margins.
D) dumping.
E) gray marketing.
Answer: D
65) Germany's Bayer Group was fined millions of dollars to settle a lawsuit alleging it had
conspired with ArcherDanielsMidland and other global companies to set prices for an enzyme
used in animal feeds. What was the issue in this lawsuit?
A) price skimming
B) market penetration
C) price bundling
D) price fixing
E) dumping
Answer: D
66) Nintendo was fined nearly $ 150 million after it was determined that the video game
company had colluded with European distributors. The distributors in countries with lower retail
prices had agreed not to sell to retailers in countries with high prices. This is a classic example
of:
A) price skimming.
B) market penetration.
C) price bundling.
D) price fixing.
E) transfer pricing.
Answer: D
67) "Cost-based," "market-based," and "negotiated" are three approaches to:

A) dumping.
B) gray marketing.
C) transfer pricing.
D) price skimming.
E) counter trade.
Answer: C
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68) Joseph Quinlan, chief marketing strategist at Bank of America, estimated that about 25
percent of U.S. merchandise exports represent shipments by American companies to their foreign
affiliates and subsidiaries. This situation underscores the importance of ________ in global
marketing.
A) dumping
B) gray marketing
C) transfer pricing
D) price skimming
E) price fixing
Answer: C
69) Which of the following is true about proper use of the term "countertrade?"
A) The term "countertrade" is interchangeable with "offsets."
B) The term "countertrade" is interchangeable with "barter."
C) The term "countertrade" is interchangeable with "counterpurchase."
D) "Countertrade" is a blanket term that refers to several different types of business transactions.
E) The term "countertrade" is interchangeable with "dumping."
Answer: D
70) The most general term for the global phenomenon involving reciprocal business interactions
between parties in various countries is known as:
A) switch trading.
B) barter.
C) offset.
D) compensation trading.
E) countertrade.
Answer: E
71) In the 1970s and 1980s, the arrangement by which PepsiCo received payment for soft drink
products sold to the Soviet Union was:
A) switch trading.
B) barter.
C) offset.
E) counterpurchase.
Answer: B
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72) The direct exchange of goods or services between parties in lieu of monetary payment is
known as:
A) barter.
B) switch trading.
C) offset.
E) counterpurchase.
Answer: A
73) Which of the following forms of countertrade does not require use of money or credit
between parties?
A) barter
B) switch trading
C) offset
D) compensation trading
E) none of the above
Answer: A
74) Which type of countertrade arrangement is required by governments seeking to reduce the
budgetary impact of expenditures for defense or telecommunications?
A) barter
B) switch trading
C) offset
D) compensation trading
E) none of the above
Answer: C
75) To win a contract to supply the United Kingdom with AWACS military aircraft, Boeing
agreed to purchase products from the UK whose value was equivalent to 130 percent of the
contract. This type of pricing arrangement, which is common when the customer is a foreign
government and the product has military applications, is known as:
A) barter.
B) switch trading.
C) compensation trading.
D) offset.
E) dumping.
Answer: D
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76) When one of the parties to a barter transaction is not willing to accept the goods included in
the transaction, that party is likely to utilize the services of a:
A) switch trader.
B) Foreign Trade Organization.
C) Foreign Sales Corporation.
D) Mittelstand owner.
E) broker.
Answer: A
77) Suppose that World Corp. signs a contract to build a lumber processing plant in Siberia. If
World Corp. signs a second contract agreeing to take partial payment for the plant in the form of
lumber products produced at the plant, it is engaging in:
A) barter.
B) switch trading.
C) offset.
E) a hybrid countertrade arrangement.
Answer: D
78) Which of the following companies would be most likely to use some form of countertrade
when selling its products in developing countries?
A) Procter & Gamble
B) Bell Helicopter Textron
C) Nokia
D) Mercedes-Benz
E) Coca-Cola
Answer: B
79) Despite the high expenses associated with operating elegant stores and purchasing
advertising space in upscale magazines, the premium retail prices that luxury goods like Louis
Vuitton command translate into handsome profits. The Louis Vuitton brand alone accounts for 60
percent of LVMH's operating profit. On the other hand, Louis Vuitton spends $ 10 million
annually battling:
A) EU regulations.
B) counterfeiters in countries such as Turkey, South Korea, & Italy.
C) competitors in European countries.
D) suppliers of needed materials.
E) export freight and taxes.
Answer: D
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80) Luxury good marketers found a new way to combat gray market imports into the United
States. In March 1995, the U.S. Supreme Court let stand an appeals court ruling prohibiting a
discount drugstore chain from selling Givenchy perfume with permission. The distinctive
packaging of the perfume is also protected by the U.S. Copyright law. The ruling implies that:
A) Givenchy can only be sold in copyrighted packages.
B) Costco and Wal-Mart will no longer be able to sell Givenchy.
C) Costco and Wal-Mart will be able to sell Givenchy with authorization.
D) gray marketers will be able to market with authorization.
E) discount drugstores cannot market a product resembling Givenchy's perfumes.
Answer: C
81) How can price be used as a strategic variable to achieve specific financial goals? Under what
conditions should skimming or penetration pricing be adapted as strategies?
Answer: Price can be used as a strategic variable based on the financial goals such as return on
investment, profit, and rapid recovery of research and product development costs. When
financial criteria such as profit and maintenance of margins are the goals, the product quality and
price becomes important aspects of the strategy. The market skimming pricing strategies is part
of a deliberate attempt to reach a market segment that is willing to pay a premium price for a
particular brand or for a specialized or unique product. The skimming price strategy is also
appropriate in the introductory phase of the product life cycle when both production capacity and
competition are limited. By deliberately setting a high price, demand is limited to innovators and
early adopters, who are willing and able to pay the price. When Apple introduced iPhone the
price used was skimming price. When the product enters the growth stage of the life cycle and
competition increases, manufacturers start to cut prices. This strategy has been used widely in the
consumer electronics industry. On the other hand, some companies are pursuing non-financial
objectives with their pricing strategy. Price can, therefore, be used as a competitive weapon to
gain or maintain market position. A market penetration pricing strategy calls for setting price
levels that are low enough to quickly build market share. The first-time exporter seldom uses
penetration pricing since it often means that the products may be sold at a loss for a certain
length of time. Many companies, when they are not qualified for patent protection, use
penetration pricing as a means of achieving market saturation before competitors copy their
product.
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82) A working knowledge of incoterms can be a source of competitive advantage to anyone
seeking an entry-level job in global marketing. What are "incoterms" and how are they
classified? How are incoterms applied in global marketing?
Answer: The internationally accepted terms of trade are known as "ncoterms." They are
classified into four different categories. Ex-works (EXW) refers to a transaction in which the
buyer takes delivery at the premises of the seller; the buyer bears all risks and expenses from that
point on. Another category of incoterms is known as F-Terms in which there are different sets of
terminologies. Free carrier (FCA) is a widely used term in global sales since it is suited for all
modes of transport. Under FCA, transfer from seller to buyer is affected when the goods are
delivered to a specified carrier at a specified destination. FAS (free alongside ship) is the
incoterm for a transaction in which the seller places the shipment alongside, or available to, the
vessel upon which the goods will be transported out of the country. The seller pays all charges up
to that point. With free on board (FOB) the responsibility and liability of the seller do not end
until the goods have cleared the ship's rail. Several other incoterms are known as "C-Terms" such
as when goods are shipped (CIF) cost, insurance freight represents the risk of loss or damage to
goods is transferred to the buyer once the goods have passed the ship's rail. In this sense, CIF is
similar to FOB. If the terms of the sale are cost and freight (CFR), the seller is not responsible
for risk or loss at any point outside the factory. A currency adjustment factor (CAF) is assessed to
protect the seller from possible losses from disadvantageous shift in the currency exchange rates.
All import charges are assessed against the landed price of the shipment (CIF value). Thus, these
terminologies help in identifying who is responsible for what prices and at what point of
exchange. In fact different incoterms for larger orders are used as incentives.
83) The currency fluctuations in global markets have a big impact on international transactions.
What actions can be adapted if the domestic currency is strong?
Answer: Currency fluctuations complicate the task of setting prices. A weakening of the home
country currency swings exchange rates in a favorable direction if the currency in the country of
business is strong. An equally opposite effect can happen when the currency is strong. In
responding to currency fluctuations, global marketers can utilize other elements of the marketing
mix besides price. Other actions that can be taken if the domestic currency is strong are: (a)
engaging in non-price competition by improving the quality of the products, delivery methods, or
after-sale services; (b) improving productivity by taking actions that may result in cost reduction;
(c) if possible, sourcing can be shifted outside the home country; (d) giving priority to exports to
countries, either temporarily or permanently, with stronger currencies; (e) trimming profit
margins and using marginal-cost pricing; (f) keeping the foreign-earned income in host country
as well as slowing down collections; (g) maximizing expenditures in local currency of the host-
country; (h) buying needed services aboard and paying them in local currencies; and (i) billing
foreign customers in the domestic currency.
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84) If a Lexus car is priced in U.S. dollars and sold at the dollar converted price in Indian rupees,
what sorts of problems can be expected? What is the difference between ethnocentric,
polycentric and geocentric pricing?
Answer: It will not be possible to sell too many cars in India if the price in U.S. dollars is
directly converted into local currency. This is the reason why there is price differential and
different methods of pricing is used. Ethnocentric pricing calls for the per-unit price of an item to
be the same no matter where in the world the buyer is located. In such instances, the importer
must absorb freight and import duties. The advantage of this pricing is that it is extremely simple
and does not require information on competitive or market conditions for implementation. The
disadvantage is that it does not respond to the competitive and market conditions of each national
market. Polycentric pricing permits subsidiary or affiliate managers or independent distributors
to establish whatever price they feel is most appropriate in their market environment. There is no
requirement that prices be coordinated from one country to another. IKEA takes a polycentric
approach to pricing. In geocentric pricing, the company neither fixes a single price worldwide
nor allows subsidiaries or local distributors to make independent pricing decisions. Instead, the
geocentric approach represents an intermediate course of action. It is based on the realization that
unique local market factors should be recognized in arriving at pricing decisions. These factors
include local costs, income level, competition, and the local marketing strategies. The important
point to note in all pricing systems is that in global marketing there is no such thing as a normal
margin.
85) Suppose that a book publisher sells a textbook for $ 150 each to its domestic distributor. The
same publisher sells the same edition of the textbook to a distributor in Thailand for $ 85 since
the affordable prices by Thai students may be much less than in the domestic market. The text
book finds its way back into the domestic market since the Thai distributor sold it back to
another marketer who sells in the domestic market for $ 85. What is this type of pricing known
as and what are the consequences of such transactions to global marketers, if any?
Answer: This practice is known as parallel importing and the goods are referred to as gray
market goods. 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 occurs
when companies employ a polycentric, multinational pricing policy that calls for setting different
prices in different country markets. Gray markets can flourish when a product is in short supply,
when producers employ skimming strategies in certain markets, or when the goods are subject to
substantial markups. Gray markets impose several costs of consequences on global marketers.
These include (1) dilution of exclusivity, where authorized dealers are no longer their sole
distributors; (2) free riding, where channel members can take actions to offset downward
pressure; (3) damage to channel relationship resulting in conflicts and other relationship
problems; (4) undermining segmented pricing schemes because of price differentials; (5)
reputation can be compromised; and (6) legal liability. Thus, gray markets can cause a variety of
problems for the manufacturers as well as distributors. Although it can benefit some customers, it
can have an adverse affect on customer loyalty.
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86) GATT and the U.S. Congress have both defined 'dumping?' What is the difference in their
definitions? Why is dumping a major issue in global marketing?
Answer: GATT's defined dumping as 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." This definition is very broad and can be interpreted in
different ways. Dumping is an important global pricing strategy issue. 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. The U.S. Commerce Department is responsible for determining whether products are
being dumped in the United States. The International Trade Commission (ITC) then determines
whether the dumping has resulted in injury to U.S. firms. Many of the dumping cases in the
United States involve manufactured goods from Asia and frequently target a single or very
narrowly defined group of products. U.S. companies that claim to be materially damaged by the
low-priced imports often initiate such cases. The Byrd Amendment calls for antidumping
revenues to be paid to U.S. companies harmed by imported goods sold at below-market prices.
For positive proof that dumping has occurred in the United States, both price discrimination and
injury must be demonstrated.
87) The European Commission recently fined Nintendo nearly $ 150 million after it was
determined that the video game company had colluded with European distributors to fix prices.
Why is price fixing not considered a good practice? What are different kinds of price fixings?
Answer: The reason why Nintendo had to pay a fine was due to price fixing which, in most
instances, is considered illegal. It is illegal for representatives of two or more companies to
secretly set similar prices for their products. This practice is known as "price fixing." It is
considered an undesirable practice since it is an anticompetitive act. Companies that collude in
this manner are generally trying to ensure higher prices for their products than would generally
be available if markets were functioning freely. There are two major types of price fixings. One
of them is described as horizontal price fixing in which competitors within an industry that make
and market the same product conspire to keep prices high. For example, if airlines collude and
decide to have higher prices that would be referred to as Horizontal Price Fixing. The next type
is called the Vertical Price Fixing which occurs when a manufacturer conspires with wholesalers
or retailers to ensure certain higher retail prices are maintained. In the case of Nintendo it was
vertical price fixing since the video game company had colluded with European distributors to
fix prices.
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88) Toyota buys on a regular basis from its subsidiaries. How is the pricing of different products
handled? What is the significance of such transactions in global marketing?
Answer: Many companies like Toyota buy from their subsidiaries. They use "transfer pricing"
for all their transactions. Transfer pricing refers to the pricing of goods, services, and intangible
property bought and sold by operating units or divisions of the same company. It concerns intra-
corporate exchanges, which are transactions between buyers and sellers that have the same
corporate parent. Transfer pricing is important because goods crossing national borders
represents a sale, therefore their pricing is a matter of interest both to the taxing agencies as well
as to the customs' services. There are three major alternative approaches that can be applied to
transfer pricing decisions. A market-based transfer price is derived from the price required to be
competitive in the global marketplace. Cost-based transfer pricing uses an internal cost as the
starting point in determining prices. A third alternative is to allow the organization's affiliates to
determine negotiated transfer prices among themselves. Market-based and cost-based transfer
pricing are the two preferred methods in the United States, Canada, Japan, and the United States.
89) Why is compensation trading also called a "buyback?" How does it differ from switch
trading?
Answer: Compensation trading is a form of countertrade that involves two separate and parallel
contracts. In one contract, the supplier agrees to build a plant or provide plant equipment, patents
or licenses, or technical, managerial, or distribution expertise. A hard currency down payment is
paid at the time of delivery. In the other contract, the supplier company agrees to take payment in
the form of the plant's output equal to its investment for a period of as many as 20 years. Interest
is subtracted from the investment. The success of compensation trading rests on the willingness
of each firm to be both a buyer and a seller. Hence, this method is referred to as "buyback." On
the other hand, Switch Trading is a mechanism that can be applied to barter or countertrade. In
this arrangement, a third party steps into a simple barter or other countertrade arrangement.
When one of the two parties in barter system is not willing to accept all the goods received in a
transaction, the third party may be a professional switch trader, switch trading house, or a bank.
The switching mechanism provides a "secondary market" for countertraded or bartered goods
and reduces the inflexibility inherent in barter and countertrade. Fees charged by switch traders
range from 5 percent of market value for commodities to 30 percent for high-technology items.
Switch traders develop their own network of firms and personal contacts.
20
90) In recent years, in light of the technological developments, many exporters have been forced
to finance international transactions by taking full or partial payment in some form other than
money. A number of alternative forms of payments known as countertrade are widely used?
How does a countertrade transaction work? How do barter transactions differ from offset?
Answer: In a countertrade transaction, a sale results in product flowing in one direction to a
buyer; with a separate stream of products and services often flowing in the opposite direction.
For example, the countries in the former Soviet bloc have historically relied heavily on
countertrade. Countertrade flourishes when hard currency is scarce. Since exchange controls may
prevent a company from expatriating earnings, the company may be forced to spend money in-
country following products that are then exported and sold in third-country markets. The reasons
importing nations may demand countertrade include the priority attached to the Western import.
The second condition may be the value of the transactions; the higher the value, the greater the
likelihood that counter trade will be involved. Also, the availability of products from other
suppliers can be a factor. Barter falls in one of the categories of countertrade. The mixed forms of
countertrade, including counterpurchase, offset, compensation trading, and switch trading belong
in a separate category. They incorporate a real distinction from barter because the transaction
involves money or credit. The term barter describes the least complex and oldest form of
bilateral, non-monetized countertrade. It is a direct exchange of goods or services between two
parties. Although no money is involved, both partners construct an approximate shadow price for
products flowing in each direction. Offset, on the other hand, is a reciprocal arrangement
whereby the government in the importing country seeks to recover large sums of hard currency
spent on expensive purchases such as military aircraft or telecommunication systems.
21

Chapter 11 Pricing Decisions: Global Marketing, 6e (Keegan/Green)

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Chapter 11 Pricing Decisions

7) Price can be used as a competitive weapon to gain or maintain market position.

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