chap11 gm6e tif

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: 1Page 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: 2Page 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



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: 2Page 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



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



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



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



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



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



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



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



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



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



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



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



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



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



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.



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.



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.



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.



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.



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.



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