4753_7. customer country and competitor country features

8/6/2019 4753_7. Customer Country and Competitor Country Features

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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


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Home country: Compare advantages and disadvantages

Customer countries footprint: Global or localcompetitor

Supplier countries: Global or local manufacturing andprocurement

Partner countries: Complementary products,

technologies, capabilities Political, legal and regulatory climate compare effects

trade agreements, home-country policies

Competitor countries

Evaluation of competitive advantage


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Tailor products and pricing

Emerging market trend of Sachet Marketing

Recognizes low income of mass of consumers andtailors 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)


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Low-cost branded products

Unilever Ala low-income laundry detergentbrand sold in Brazil

Microtravel appeal of sachets to travelers of

all income levels

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

Nokia 1100 -- popular in rural India


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Customer country features

Elasticity of demand

Elasticity of excess demand faced by the firm has twocomponents:

Price responsiveness of firms customers:

Market demand elasticity

Price responsiveness of firms competitors:

Competitor supply elasticity


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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


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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 differsdue to trade barriers and domestic regulations

Experience and technology of suppliers differs


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Do you think that Coca-Cola prices will differ?


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Elastic Demand ifE > 1

Example 1 Price increase from 10 to

11, that is 10%

Suppose quantity sold falls

from 200 to 160 units, thatis 20%

E = 20/10 = 2

Inelastic Demand ifE < 1

Example 2 Price increase from 10 to 11,

10%

Suppose quantity sold falls

from 200 to 190 units, that is5%

E = 5/10 =

Elasticity of Demand

The percentage change in

quantity sold divided by thepercentage change in price PP

QQ

E /

/

(

(

!


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Revenue Effects of the Two Examples

P1 P2 Change

in PQ1 Q2 Change

in QR1 R2 Chan

ge in

R

10 11 10% 200 160 20% 2000 1760 (240)

10 11 10% 200 190 5% 2000 2090 90

InelasticDemand: E =

ElasticDemand: E= 2


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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.


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Revenue effects

Observe that marginal revenue is less than the price.

MR= P(1 1/E).

This is because raising the price affects revenue intwo ways:

More is earned per unit sold

fewer units are sold

The relative influence of these two effects ismeasured by the elasticity


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Revenue effects

If the elasticity of demand is greater than one, aprice increase lowers revenue (a price cut increasesrevenue)

If elasticity of demand is less than one, a priceincrease also increases your revenue (and a pricedrop cuts your revenue)

Managers should try to estimate elasticity of demandnumbers (formally or informally) in pricing acrossdifferent countries


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Pricing by a firm with market power: Review

D(P)

Q

MR

PM

MC

PC

P

QM QC

PM(1 1/E) = MC.


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Pricing to market

Prices to satisfy the profit-maximizing conditions in eachcountry:

PA, PF = Prices in country A and F EA, EF = Price elasticities of demand in country A and F

MC = Marginal Cost

.11 MCE

PA

A!

.11 MCE

PF

F!


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Pricing to market

At the Zara stores, pricetags stated in manycurrencies and for multiplecountries.


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Pricing to market


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Pricing to market

Advantages of Uniform Pricing Consistent pricing across

countries

Lowers transaction costs

Avoids gray market arbitrage Avoids customer complaints

Global product:: standardizemarketing, sales, product

features Problem: dealing with

exchange rate fluctuations

Advantages of Pricing to Market Meet or beat local competition

Price leader or productdifferentiation strategies may

differ by market served Maximize profit by market

segment

Tailoring marketing, sales,

service and product features tolocal market


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Limits on Pricing to Market

Legal restrictions on price discrimination, most-favored-nation agreements

Limited legal protections for original seller allow gray marketarbitrage

Low trade costs allow arbitrage: Price difference must be lessthan cost of trade between countries A and F to avoidarbitrage:

Differences in the elasticity of demand (responsiveness ofdemand to price changes) must be large enough to justifydifferent prices in different markets

TPP FA


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Markups in the European Car Industry

Verboven (1996):

Studies 5 European

countries Estimates relative markups

Looks at the wholesalelevel

Estimates elasticities fordifferent groups of cars

Recall the price equations:

Rewrite as relative markup:

.11 MCEP AA !

.1

AA

A

EPMCP

!


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Consider markup equation at the wholesale level

Customers are dealers, sellers are the manufacturers

Pij: wholesale price in market i for model j

MCij: 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 ijijijij

EP

MCP

!


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Lerner Index:

Elasticity of demandEik

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 theclass of models

.1

ikEL !


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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 lowerthe class - it is greater on smaller models!

Note that Italys lower elasticities (higher Lerner-indices)reflect FIAT market power and high import quota restrictions


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Verboven (1996) concludes:

Domestic car companies are able to exploit domestic marketpower in lower segments

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

The degree of price discrimination is more pronounced thelower the class


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Summary and take-away points

Managers should perform target country analysis to estimatecustomer demand elasticity and competitor supply response

Pricing to market based on differences in demand elasticitiesacross countries, reflects customer country demand andcompetitor supply responses

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

Lower costs of trade tend to enforce uniform pricing

4753_7. customer country and competitor country features

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