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Chapter 7: Pricing in International Trade		The Class Text-Book Export-Import Theory, Practices and Procedures by Belay Seyoum (2nd Edition: Routledge, 2009) ISBN: 978-0-7890-3420-5 Click here on this image on the left to browse the information about this book at amazon.com
Chapter Outline	Seyoum Chapter 07
Sample Multiple Choice Questions Talking-Points for the Review Questions
Information and materials on this page are based on those provided by the author, Dr. Belay Seyoum.   Chapter Outline Pricing Price is an important factor in determining a firm’s ability to compete in world markets. For many companies, pricing policies and procedures are secret information and not easily available to outsiders. Export prices should be high enough to make a reasonable profit and yet low enough to be competitive in the market. The crucial element in determining price relates to the value consumers place on the product. Products rarely sell on one factor alone, and the exporter should be competitive on non-price factors of different kinds.   Sources of Export Competitiveness Price and non-price factors such as reliable delivery, short delivery time, product reliability, product quality, design flexibility, support services, financial services. Export Pricing Objectives		Chapter 01. Growth and Direction of International Trade Chapter 02. International and Regional Agreements Affecting Trade Chapter 03. Setting Up the Business Chapter 04. Planning and Preparations for Export Chapter 05. Export Channels of Distribution Chapter 06. International Logistics, Risk, and Insurance Chapter 07. Pricing in International Trade Chapter 08. Export Sales Contracts Chapter 09. Trade Documents and Transportation Chapter 10. Exchange Rates and International Trade Chapter 11. Methods of Payment Chapter 12. Countertrade Chapter 13. Capital Requirements and Private Sources of Financing Chapter 14. Government Export Financing Programs Chapter 15. Regulations and Policies Affecting Exports Chapter 16. Import Regulations, Trade Intermediaries, and Services Chapter 17. Selecting Import Products and Suppliers Chapter 18. The Entry Process for Imports Chapter 19. Import Relief to Domestic Industry Chapter 20. Intellectual Property Rights

Market share, profits, a targeted level of return on investment.

 

Pricing and Markup Policy

 

	High markups are common in industries with relatively few competitors and which produce differentiated products.
	Low markups are common in sectors of increased competition.

 

Determinants of Export Prices

Internal Variables

Cost of production, cost of market research, business travel, product modification and packing, consultants, freight forwarders, and level of product differentiation

External Variables

Supply and demand: The pricing decisions for exports are subject to the influence of the supply of raw materials, parts, and other inputs. Location and environment of the foreign market: Climatic conditions often require product modification in different markets, and this is reflected in the price of the export product. Government regulations in the home country: Different regulations in the home country have a bearing on export pricing.

Approaches to Export Pricing:
 

	Cost-based pricing: export price is based on full cost and markup or full cost plus a desired amount of return on investment.
	Marginal pricing: export price is based on the variable cost of producing the product.
	Skimming versus penetration pricing: price skimming is charging a premium price for a product; penetration pricing is based on charging lower prices for exports to increase market share.
	Demand-based pricing: export price is based on what the market could bear.
	Competitive pricing: export prices are based on competitive pressures in the market

Terms of Sale:
 

	Despite wide differences among national laws, there is a high degree of uniformity in contract practices for the export and import of goods.
	The universality of trade practices, including terms of sale, is due to the development of the law merchant by international mercantile custom.
	Trade terms are intended to define the method of delivery of the goods sold and the attendant responsibilities of the parties.
	Such terms also help the seller in the calculation of the purchase price.

Group of Terms of Sale, 2000

All trade terms are classified into four groups based on the point of transfer of risk (delivery) from seller to buyer:

Group E	(Ex Works) Buyer or agent must collect the goods at the seller’s works or warehouse.
Group F	FCA, free carrier: Place of delivery could be the carrier’s cargo terminal (seller not obligated to unload) or a vehicle sent to pick up the goods at the seller’s premises (seller required to load the goods on the vehicle). FAS, free alongside ship (named port of shipment): Requires the seller to deliver goods to a named port alongside a vessel to be designated by the buyer. Seller’s responsibilities end upon delivery alongside the vessel. FOB, free on board (named port of shipment): Seller is obliged to deliver the goods on board a vessel to be designated by the buyer.
Group C	CIF cost, insurance, freight: This term requires the seller to arrange for carriage by sea and pay freight and insurance to a port of destination. Seller’s obligations are complete ( transfer of risk) when the goods are put onboard the ship at the port of departure. CFR, Cost and freight: It is similar to CIF term except that the seller is not obligated to arrange and pay for insurance. CPT, carriage paid to: It is similar to CFR term except that it may be used for any mode of transportation. CIP, carriage and insurance paid to: It is similar to CPT term except that the seller is required to arrange and pay for insurance.
Group D	DAF, Delivery at frontier: seller bears all risk of loss to the goods till the time they have been delivered to buyer at the frontier. DES, Delivery Ex ship: Applied only for waterborne transportation. This term requires the seller to deliver goods to a buyer at an agreed port of arrival. DEQ, Delivery Ex quay:  seller is required to deliver goods at the quay at the port of destination. DDP, Delivered duty paid: goods placed at the buyer’s disposal on any means of transport not unloaded at the port of arrival. DDU, Delivered duty unpaid: similar to DDU except that the seller pays for import duties.

Sample Multiple Choice Questions

 

	True	False
1.			Export prices should be low enough to remain competitive in the market, yet high enough to make reasonable profit.
2.			Parallel or gray markets are created when the product is purchased at a high price in one market and sold in markets that enjoy higher prices.
3.			One of the external forces that influences export pricing is location and environment of the foreign market.
4.			The UCC states that where a second-party carrier is not involved, risk of loss passes not upon mere tender of delivery but when the seller ships the goods.
5.			In cost-based pricing, the export price is based on the variable cost of producing the product.
							True	False
Mismanagement of export pricing could often lead to:						6.			Development of parallel markets
						7.			Pressures for price reductions
Which of the following policies to pricing and markups apply to both domestic and export markets?
8.				High markups are common in industries with relatively large competitors.
9.				High markups are common in industries with relatively few competitors.
10.				Export prices tend to be relatively high in sectors where increased competition exists.

Talking-Points for the Review Questions

1. High markups are common in industries with relatively few competitors. Discuss and provide examples.
   
   High markups are considered as rent arising from market power. They may also be due to R & D expenditures and skilled labor force. In the chemical industry, the biggest profits are in specialty chemicals designed and produced for particular industrial uses.
    

2. The large influx of shrimp imports into the United States from Asia and Latin America depressed wholesale prices by over 40% between 1997 and 2002. Despite such lower prices, shrimp entrées at some seafood restaurants in the United States rose by about 28% during the same period. Discuss why prices (shrimp prices at sea food restaurants) are not aligned with costs.
   
   Shrimp is considered a luxury item and consumers are willing to pay more for it. This strong perception of value allows retailers to maintain or increase shrimp prices despite decreases in wholesale costs.
    

3. What is the difference between marginal and cost-based pricing?
   
   Marginal pricing is the export price based on variable cost of producing the product, whereas cost-based pricing is based on full cost plus a desired amount of return on investment.
    

4. Seller agreed to deliver 300 tons of coffee to buyer DES port of Montreal, Canada. The goods were transported and unloaded at the port and kept at customs shed for inspection and payment of duties. The buyer was notified of the arrival of the merchandise and its location. Before the buyer picked up the goods, the customs shed (including the merchandise in it) was destroyed by fire. The buyer claims refund of the purchase price stating that she did not receive the goods. Is the seller responsible?
   
   No. Under a DES contract, the seller fulfills his or her obligations by delivering the goods to the port of destination and paying off the shop. The buyer is responsible for clearing the goods through customs.
    

5. In reference to question 4, would the outcome be different if the contract had been DEQ port of Montreal?
   
   It depends on whether the goods had been cleared from importation by customs. If they had, then the buyer would be liable for the loss. If not, the seller would be liable.

    

6. Seller in New York agrees to ship goods to buyer in Lima, Peru, under a CIF contract. The goods were loaded on the ship and seller tendered the necessary documents to buyer for payment (in New York). The buyer refused payment claiming that it will only pay after inspection upon arrival of the goods at the port of destination. Is the seller entitled to payment before arrival of the goods?
   
   Yes. A buyer has a duty to pay upon presentation of documents by the seller.
    

7. Discuss the major differences between CIF and arrival contracts such as DES.
   
   
   In arrival contracts, delivery is affected when the goods are placed at the disposal of the buyer. In CIF terms, delivery is effected upon loading the goods on board the vessel at the port of departure.

    

8. State the major differences between Incoterms 1990 and Incoterms 2000.
   
   Unlike Incoterms (1999), Incoterms (2000) places the responsibility for export clearance on the seller in FAS contracts, requires the buyer to clear imports at own expense in DEQ term, and obligates seller to load the goods on buyer’s collecting vehicle under FCA term.

    

9. What are the limitations of Incoterms? Compare and contrast Incoterms with the Uniform Commercial Code.
   
   Incoterms deal only with matters pertaining to the interpretation of terms of delivery. The terms do not deal with transfer of property rights, or exemptions from liability. Differences between Incoterms and UCC include certain applications of ex-works, FAS, FOB, and CIF contracts.
    

10. In what cases would export-import managers prefer to use Group C (shipment) terms?

    In cases in which the seller can procure insurance at competitive price.