Customer country and competitor country features © Professor Daniel F. Spulber.

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Customer country and competitorcountry features

• Customer preferences• Elasticity of demand • Income per capita and income distribution• Customer knowledge• Distribution infrastructure • Society and culture• Political, legal and regulatory climatePredict effect on earnings and choose

target countries

Customer country featuresDistribution and sales

• Home country: Compare advantages and disadvantages

• Customer countries footprint: Global or local competitor

• Supplier countries: Global or local manufacturing and procurement

• Partner countries: Complementary products, technologies, capabilities

• Political, legal and regulatory climate – compare effects trade agreements, home-country policies

Competitor countriesEvaluation of competitive advantage

Tailor products and pricing

Emerging market trend of “Sachet Marketing”• Recognizes low income of mass of consumers

and tailors offerings – 2/3 of world population makes $1,500 or less per year

• Affordable sizes and products• Maintain quality and extend appeal of brands

See reading on-line: Four Billion Customers

(trendwatching.com, 2005)

Low-cost branded products

• Unilever Ala – low-income laundry detergent brand sold in Brazil

• Microtravel – appeal of sachets to travelers of all income levels

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

• Nokia 1100 -- popular in rural India

Customer country features Elasticity of demand

Elasticity of excess demand faced by the firm has two components:

• Price responsiveness of firm’s customers:Market demand elasticity

• Price responsiveness of firm’s competitors:Competitor supply elasticity

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

Elasticity of Demand:Price Responsiveness of Competitors

Different across countries:

• Different labor supply elasticities

• Different operating costs across countries

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

• Experience and technology of suppliers differs

Do you think that Coca-Cola prices will differ?

Elastic Demand if E > 1Example 1– Price increase from

10 to 11, that is 10%– Suppose quantity

sold falls from 200 to 160 units, that is 20%

E = 20/10 = 2

Inelastic Demand if E < 1Example 2– Price increase from 10 to

11, 10%– Suppose quantity sold

falls from 200 to 190 units, that is 5%

E = 5/10 = ½

Elasticity of Demand The percentage change in quantity sold divided by the percentage change in price PP

Revenue Effects of the Two Examples

Change

Change in Q

Change in R

Inelastic Demand: E = ½

Elastic Demand: E= 2

Elasticity of demand: Optional Review

Revenue:R = P Q

Marginal revenue -- change in revenue per unit change in output:

MR = P + QΔP/ΔQ = P(1 + (Q/ΔQ)(ΔP/P))

So,MR = P(1 − 1/E).

Consumer benefit if elasticity is a constant: B(Q) = Q (E – 1)/E.

Revenue effects

• Observe that marginal revenue is less than the price.

MR = P(1 − 1/E).

This is because raising the price affects revenue in two ways:– More is earned per unit sold– fewer units are sold

• The relative influence of these two effects is measured by the elasticity

Revenue effects

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

• If elasticity of demand is less than one, a price increase also increases your revenue (and a price drop cuts your revenue)

Managers should try to estimate elasticity of demand numbers (formally or informally) in pricing across different countries

Pricing by a firm with market power: Review

PM(1 − 1/E) = MC.

Pricing to market

• Prices to satisfy the profit-maximizing conditions in each country:

• PA, PF = Prices in country A and F

• EA, EF = Price elasticities of demand in country A and F

• MC = Marginal Cost

.11 MCEPA

.11 MCEPF

Pricing to market

At the Zara stores, price tags stated in many currencies and for multiple countries.

Pricing to market

Advantages of Uniform Pricing

• Consistent pricing across countries

• Lowers transaction costs• Avoids gray market

arbitrage• Avoids customer

complaints• Global product::

standardize marketing, sales, product features

• Problem: dealing with exchange rate fluctuations

Advantages of Pricing to Market

• Meet or beat local competition

• Price leader or product differentiation strategies may differ by market served

• Maximize profit by market segment

• Tailoring marketing, sales, service and product features to local market

Limits on Pricing to Market

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

• Limited legal protections for original seller allow gray market arbitrage

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

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

TPP FA

Markups in the European Car Industry

Verboven (1996):• Studies 5 European

countries• Estimates relative

markups• Looks at the

wholesale level• Estimates elasticities

for different groups of cars

• Recall the price equations:

• Rewrite as relative markup:

.11 MCEPA

• 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.

Markups in the

European Car

Industry

• Lerner Index:

• Elasticity of demand Eik is for market i and car model in segment k

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

• With the exception of Italy, Lerner indices increase with the class of models

Verboven (1996):• Finds that price discrimination follows the Lerner-

indices, that is price discrimination follows demand elasticities

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

• Note that Italy’s lower elasticities (higher Lerner-indices) reflect FIAT market power and high import quota restrictions

Verboven (1996) concludes:• Domestic car companies are able to exploit

domestic market power in lower segments

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

• The degree of price discrimination is more pronounced the lower the class

Summary and take-away points

• Managers should perform target country analysis to estimate customer demand elasticity and competitor supply response

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

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

• Lower costs of trade tend to enforce uniform pricing

Customer country and competitor country features © Professor Daniel F. Spulber.

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