3/26/2025

Chapter 6: Pricing in international marketing

• Considerations in setting price

International Marketing • International pricing strategies compared with

domestic pricing strategies

• Factors influencing international pricing decisions

• International pricing policies
Lecturer: Pham Thi Minh Chau (Ms.) | MSc.
• International pricing strategies
School of Economics and International Business
Phone: 094.202.4060 • Price changes
Email: minhchaupham@[Link] • Parallel importing and grey market goods
• Dumping
• Transfer pricing

1 2

Pricing is part of the marketing mix, and

therefore pricing decisions must be integrated
with the other three Ps of the marketing mix.

Price is the only area of the global marketing mix where policy can be changed
rapidly without large direct cost implications.

This characteristic, plus the fact that overseas consumers are often sensitive to
price changes, results in the danger that pricing action may be resorted to as a
quick fix instead of changes being made in other areas of the firm’s marketing
Generally, pricing policy is one of the most important yet often least programme.
recognized of all the elements of the marketing mix. The other elements of
 It is important that management realizes that constant fine-tuning of prices in
the marketing mix all lead to costs. The only source of profit to the firm overseas markets should be avoided and that many problems are not best
comes from revenue, which in turn is dictated by pricing policy. In this addressed by pricing action.
chapter we focus on a number of pricing issues of special interest to
international marketers. 3 4

1
 3/26/2025
International pricing strategies compared with
Considerations in setting price domestic pricing strategies

Pricing in domestic markets Pricing in international markets

 Based on the relatively  Much more complex, affected by

straightforward process of many additional external factors, such
allocating the total estimated cost as fluctuations in exchange rates,
of producing, managing and accelerating inflation in certain
marketing a product or service countries and the use of alternative
and adding an appropriate profit payment methods such as leasing,
margin. barter and counter-trade.
• If customers perceive that a product’s price is greater than its value,
 Problems arise when costs
they won’t buy it. increase and sales do not
• If the company prices a product below its costs, profits will suffer. materialize, or when competitors
• Between the two extremes, the “right" pricing strategy is one that undercut them.
delivers both value to the customer and profits to the company.

5 6

Factors influencing international pricing decisions

Firm-level factors

Product factors

Environmental factors

Market factors

7 8

2
 3/26/2025
Firm-level factors Firm-level factors
 Country-of-origin is a major factor that consumers take into account when they
 International pricing is influenced by past and current corporate philosophy, make a decision about the maximum price they are willing to pay for a branded
organization and managerial policies. product. Managers can use this information in their pricing decisions. If their brand
originates and is produced in a country with a good reputation and image, the
 The short-term tactical use of pricing in the form of discounts, product offers and implementation of a premium pricing strategy will be easier, because consumers’
reductions is often emphasized by managers at the expense of its strategic role. willingness to pay is also likely to be higher.

Japanese firms have approached new markets For many years Volkswagen
with the intention of building market share over a (VW) used the slogan ‘Das Auto’
period of years by reducing price levels, (‘The Car’), indicating that the
establishing the brand name and setting up car is developed and
effective distribution and servicing networks. manufactured in Germany,
although today’s car production
The market share objectives of these Japanese also takes place in China and
firms have usually been accomplished at the other parts of the world.
expense of short-term profits, as international However, this provided the
Japanese firms have consistently taken a long- opportunity for VW to charge a
term perspective on profit. They are usually higher price to its consumers,
prepared to wait much longer for returns on compared with, for example,
investments than some of their Western French-produced cars
counterparts.
9 10

Product factors Product factors

 Key product factors include the unique and innovative features of the product
and the availability of substitutes. Price escalation: All cost factors (e.g. firms’ net ex-works price, shipping costs,
tariffs, distributor mark-up) in the distribution channel add up and lead to price
 Whether the product is a service or a manufactured good or commodity good escalation. The longer the distribution channel, the higher the final price in the
sold into consumer or industrial markets is also significant. foreign market.

 The extent to which the organization has had to adapt or modify the product or  Many exporters are not aware of rapid price escalation; they are preoccupied
service, and the level to which the market requires service around the core with the price they charge to the importer. However, the final consumer price
product, will also affect cost and thereby have some influence on pricing. should be of vital concern because it is on this level that the consumer can
compare prices of different competitive products and it is this price that plays a
 Costs are helpful in estimating how rivals will react to the setting of a specific major role in determining the foreign demand.
price. Added to the above is the intermediary cost, which depends on channel
length, intermediary factors and logistical costs.  The following management options are available to counter price escalation:
 Rationalizing the distribution process.
 Lowering the export price from the factory (firm’s net
price)
 Establishing local production of the product within the
export market to eliminate some of the cost.
 Pressurizing channel members to accept lower profit
margins. This may be appropriate if these intermediaries are dependent on the
manufacturer for much of their turnover.
11
12

3
 Environmental factors
3/26/2025
The example in Table 15.1
shows that due to
 The national government control of exports and imports
additional shipping,
insurance and distribution
Import controls (tariffs, quotas and various non-tariff barriers) are designed to limit
charges, the exported imports in order to protect domestic producers or reduce the outflow of foreign
product costs some 21 per exchange.
cent more in the export  Tariffs directly increase the price of imports unless the exporter
market than at home. or importer is willing to
absorb the tax and accept lower profit margins.
If an additional distribution  Quotas have an indirect impact on prices. They restrict
link (an importer) is used, supply, thus causing the price of the import to increase.
the product costs 39 per  Since tariff levels vary from country to country, there is an
cent more abroad than at incentive for exporters to vary the price somewhat from country to country. In some
home. countries with high customs duties and high price elasticity, the base price may
have to be lower than in other
countries if the product is to achieve satisfactory volume in these markets.

 Government regulations on pricing can also affect the firm’s pricing strategy.
Many governments tend to have price controls on specific products related to
health, education, food and other essential items. Other policies and regulations
that affect pricing decisions include dumping legislation, resale price maintenance
legislation, price ceilings, and general reviews of price levels.

13 Fluctuation
currency in the
can affect theexchange rate;
firm’s pricing Inflation.
structure and profitability 14
An increase (revaluation) or decrease (devaluation) in the relative value of a

Market factors Market factors

 One of the critical factors in the foreign market is the purchasing power  The nature of competition (e.g. oligopoly or monopoly) can influence the
of the customer – the customer’s ability to pay. firm’s pricing strategy.

 Pure competition: Price is set in the marketplace. Price tends to be just

 Pricing decisions are bounded not only by cost and the nature of enough above costs to keep marginal producers in business.
demand but also by competitive actions. The pressure of competitors
may also affect international pricing.  Monopolistic competition: firms selling products that are differentiated from
one another (e.g. by branding or quality), it can charge a higher or lower price
than its rivals.
 If competitors do not adjust their prices in
response to rising costs, management—even if acutely aware of  Oligopoly: A market structure characterized by a small number of sellers who
the effect of rising costs on operating margins—will be severely control the market. Oligopolies are price setters rather than price takers. There
constrained in its ability to adjust prices accordingly. are so few firms that the actions of one firm can influence the actions of the
other firms.
 Conversely, if competitors are manufacturing or
sourcing in a lower- cost country, it may be necessary to cut prices  Monopoly: Exists if there is one seller in the market, such as a state-owned
company, e.g. a local electricity supplier, postal service company or a gas
to stay competitive.
company. The seller has the control over the market and can solely determine
the price of its product.
15 16

4
 3/26/2025
Market factors International pricing policies
 When considering how customers will respond to a given price strategy, Nagle
(1987) has suggested 09 factors that influence the sensitivity of customers to
prices:

1. more distinctive product;

Ethnocentric pricing
2. greater perceived quality of products;
3. consumers are less aware of substitutes in the market;
4. difficulty in making comparisons (e.g. in the quality of services such as
consultancy or accountancy);
5. the price of a product represents a small proportion of total expenditure of the Polycentric pricing
customer;
6. the perceived benefit for the customer increases;
7. the product is used in association with a product bought previously, so that, for
example, components and replacements are usually extremely highly priced;
8. costs are shared with other parties; Geocentric pricing
9. the product or service cannot be stored.

17 18

International pricing policies International pricing policies

Ethnocentric pricing (Extension pricing) Polycentric pricing (Adaptation pricing)

Ethnocentric pricing calls for the per-unit Polycentric (adaptation) pricing permits subsidiary or affiliate
price of an item to be the same no matter managers or independent distributors to establish whatever price they
where in the world the buyer is located. In feel is most appropriate in their market environment. There is no
such instances, the importer must absorb requirement that prices be coordinated from one country to the next.
freight and import duties.
 Advantage: it responds to the competitive and market conditions of
 Advantage: it offers extreme simplicity each national market  maximize the company’s profits in each
because it does not require information on national market.
competitive or market conditions for
implementation.  Disadvantage: when disparities in prices between different country
markets exceed the transportation and duty costs separating the
 Disadvantage: it does not respond to the markets, enterprising individuals can purchase goods in the lower-
competitive and market conditions of each price country market and then transport them for sale in markets
national market and, therefore, does not
where higher prices prevail (arbitrage)
maximize the company’s profits in each
national market or globally.
19 20

5
 3/26/2025
International pricing policies International pricing strategies

Geocentric pricing
1. Skiming pricing

 A company using geocentric pricing neither fixes a single price worldwide, 2. Marketing pricing
nor allows subsidiaries or local distributors to make independent pricing
decisions. Instead, the geocentric approach represents an intermediate 3. Penetration pricing
course of action.
4. Target costing
 Based on the realization that unique local market factors should be
recognized when arriving at pricing decisions. These factors include local 5. Cost-based pricing
costs, income levels, competition, and the local marketing strategy. Price
must also be integrated with other elements of the marketing program. 6. Product line pricing

 Recognizes that price coordination from headquarters is necessary in 7. Captive pricing

dealing with international accounts and product arbitrage. This approach
also consciously and systematically seeks to ensure that accumulated 8. Product bundle pricing
national pricing experience is leveraged and applied wherever relevant.
9. Freemium

21 22

Skimming pricing

In this strategy a high price is charged to ‘skim the cream’ from the top
end of the market, with the objective of achieving the highest possible
contribution in a short time. As more segments are targeted and more of
the product is made available, the price is gradually lowered.

For a marketer to use this approach:

 The product has to be unique, and some segments of the market must
be willing to pay the high price.

 Products should be designed to appeal to affluent and demanding

consumers, offering extra features, greater comfort, variability or ease
of operation.

 The firm trades off a low market share against a high margin.
23 24

6
 3/26/2025
Skimming pricing Market pricing
If similar products already exist in the target market, market pricing may be
 One way of calculating the final price is to use the concept of ‘customer used. The final customer price is based on competitive prices.
value-based pricing’ by asking: ‘How can we create additional customer
value and increase the customer willingness to pay’.  The exporter needs a thorough knowledge of product costs and confidence that
the product life cycle is long enough to warrant entry into the market. It is a
reactive approach and may lead to problems if sales volumes never rise to
 Problems associated with skimming are as follows: sufficient levels to produce a satisfactory return.

 From the price that competitors are charging on average, it is possible to make
 Having a high price but a small market share makes the firm
a so-called retrograde calculation where the firm uses a ‘reversed’ price
vulnerable to aggressive local competition. escalation to calculate backwards (from market price) to the necessary (ex
factory) net price, which should then be compared with the variable costs. If this
 Maintenance of a high-quality product requires a lot of resources net price can create a satisfactory contribution margin then the firm can go
(promotion, after-sales service) and a visible local presence, which ahead.
may be difficult in distant markets.
 The main advantage of this approach is that the competitive situation is taken
into account. The main disadvantage is that aspects related to the demand
 If the product is sold more cheaply at home or in another country,
function are ignored. In addition, a strong competitive focus can increase the
grey marketing (parallel importing) is likely.
risk of a price war
25 26

Penetration pricing Penetration pricing

A penetration pricing policy is used to stimulate market growth Motives for pricing at low levels in certain foreign markets might include:
and capture market shares by deliberately offering products at
low prices.  Intensive local competition from rival companies

 Lower income levels of local consumers

 This approach requires mass markets, price-sensitive customers and  The belief in some firms that, since their R&D and other overhead costs are
reduction in unit costs through economies of scale and experience covered by home sales, exporting represents a marginal activity intended
merely to bring in as much additional revenue as possible by offering a low
curve effects.
selling price.

 The basic assumption that lower prices will increase sales will fail if the
main competitors reduce their prices to a correspondingly low level. E.g: Japanese companies have
used penetration pricing
intensively to gain market share
 Another danger is that prices might be set so low that they are not
leadership in a number of
credible to consumers. There are confidence levels for prices below markets, such as cars, home
which consumers lose faith in the product’s quality. entertainment products and
electronic components.
27 28

7
 3/26/2025
Target costing
Target costing is a system under which a company plans in advance for
the price level, product costs, and margins that it wants to achieve for a
new product. If it cannot manufacture a product at these planned levels,
Target costing then it cancels the design project entirely.

 Target costing ensures that development teams will bring profitable

vs. products to market not only with the right level of quality and functionality
but also with appropriate prices for the target customer segments

Cost-based pricing  The company reasons backward from customers’ needs and willingness
to pay instead of following the common practice of cost-plus pricing.

Japanese companies have traditionally

approached cost issues in a way that
results in substantial production savings
and products that are competitively
priced in the global marketplace.
Toyota, Sony, Olympus, and Komatsu
are some of the well-known Japanese
29 companies that use target costing.30

Target costing

The target costing process

• Determine the segment(s) to be targeted and prices that customers in the

segment will be willing to pay. Using market research techniques such as focus
groups analysis, the team seeks to better understand how customers will perceive
product features and functionalities.

• Compute overall target costs with the aim of ensuring the company’s future
profitability.

Target costing was used in the development of Renault’s Logan, a car that retails • Allocate target costs to the product’s various functions. Calculate the gap
for less than $10,000 in Europe. According to Luc-Alexandre Ménard, chief of between the target cost and the estimated actual production cost. Think of debits
Renault’s Dacia unit, the design approach prevented technical personnel from and credits in accounting: Because the target cost is fixed, additional funds
adding features that customers did not consider absolutely necessary. For allocated to one subassembly team for improving a particular function must come
example, the Logan’s side windows have relatively flat glass; curved glass is more from another subassembly team’s funds.
attractive, but it adds to the cost. The Logan was originally targeted at consumers
in Eastern Europe; to the company’s surprise, it has also proven to be popular in • Obey the cardinal rule: If the design team can’t meet the targets, the product
Germany and France. should not be launched.

31 32

8
 3/26/2025
In Mexico and other emerging markets, P&G managers Cost-based pricing
know that workers are often paid a daily wage and that
its Mexican customers generally carry 5- and 10- peso
coins. To keep prices of shampoo and detergent below, Cost-based (cost-plus) pricing is the practice of setting prices based
say, 11 or 12 pesos and still ensure satisfactory profit on the cost of the goods or services being sold. A desired profit margin is
margins, P&G uses target costing (P&G calls it “reverse added to the cost of an item, which results in the final selling price.
engineering”).

Rather than create an item and then assign a price to

it—the traditional cost-plus approach—the company  Companies frequently use a method pricing when selling goods
first estimates what consumers in emerging markets outside their home-country markets.
can afford to pay. From there, product attributes and
manufacturing processes are adjusted to meet various  However, when goods cross national borders, additional costs and
pricing targets. For example, to hold down the cost of
expenses such as transportation, duties, and insurance are incurred. If
its Ace Natural detergent, which is used to hand-wash
clothes in Mexico, P&G reduced the product’s enzyme
the manufacturer is responsible for those costs, they must be included.
content. The result: a product that costs a peso less By adding the desired profit margin to the cost-plus figure, managers
than a single-use packet of regular Ace. Plus, the can arrive at a final selling price.
reformulated product is gentler on the skin.

The target costing approach can be used with inexpensive consumer nondur3a3bles. 34

Product line pricing

Captive pricing

Laptops, smartphones, tablets, and other popular consumer electronics products

Product bundle pricing
exemplify many characteristics of today’s global supply chain: No matter what the
brand—Acer, Apple, Dell, or HP, for example—components are typically sourced in
several different countries, and the products themselves are assembled in China, Freemium
Taiwan, or Japan. Within a matter of days, the goods are sent via airfreight to the
countries where they will be sold. In international marketing, the total cost will
depend on the ultimate market destination, the mode of transport, tariffs, various
fees, handling charges, and documentation costs. Export price escalation is the
increase in the final selling price of goods traded across borders that reflects these
35 36
factors.

9
 3/26/2025
Product line pricing Product line pricing
 With product-line pricing, the various items in the line may be  Setting the price steps between various
differentiated by pricing them appropriately to indicate, for example, an products in a product line based on cost
economy version, a standard version and a top-of-the-range version. differences between the products, customer
evaluations of different features, and
 One of the products in the line
competitors’ prices.
may be priced to protect against
competitors or to gain market
 The task is to establish perceived value
share from existing competitors.
differences that support the price
differences.
 Products with less competition
may be priced higher to
 Examples: Apple’s iPads. An iPad Air with
subsidise other parts of the
product line, so as to make up Wi-Fi and 16Gb storage costs $499. An
for the lost contribution of such iPad Air with same limited storage, but has
fighting brands. both Wi-Fi and 4G connection costs $629.
The prices continue to rise as you go along
 Some items in the product line the line of products with higher storage
may be priced very low to serve capacity.
as loss leaders and induce
customers to try the product. 37 38

Captive pricing

 Setting a price for products that must be used along with a main product.

 Examples of captive products are razor blade cartridges, videogames,

and printer cartridges. Producers of the main products (razors, videogame
consoles, and printers) often price them low and set high markups on the
supplies.

A razor handle has no value without blades;

thus Gillette can sell a single Mach3 razor for
less than $5—or even give the razor away for
free. Over a period of years, the company will
make significant profits from selling packages
of replacement blades. As the saying goes, “If The biggest profits in the video industry come from sales of game software; even
you make money on the blades, you can give though Sony and Microsoft may actually lose money on each console, sales of hit
away the razors.” video titles generate substantial revenues and profits. Sony, Microsoft, and
Nintendo also receive licensing fees from the companies that create the games.
Moreover, typical households own only one or two consoles but dozens of
39 games. 40

10
 3/26/2025
Product bundle pricing
 Using product bundle pricing, sellers
Amazon makes little or often combine several products and
no profit on its Kindle offer the bundle at a reduced price
readers and tablets. It
hopes to more than  Price bundling can promote the sales of
make up for thin margins products consumers might not otherwise
through sales of digital
buy, but the combined price must be low
books, music, movies,
subscription services,
enough to get them to buy the bundle.
and other content for the
devices.  Example:
“We want to make  Fast-food restaurants bundle a
money when people use burger, fries, and a soft drink at a
our devices, not when “combo” price.
they buy our devices,”  Telecommunications companies
declares Amazon CEO bundle TV service, phone service,
Jeff Bezos
and high-speed Internet connections
at a low combined price.
41 42

Product bundle pricing Freemium

Freemium (free + premium = freemium): Freemium is a pricing
strategy by which a product or service is provided free of charge
(free), but money is then charged afterwards for more advanced
features or functionality (premium).
Cosmetics companies often use
bundle pricing to sell products that
may not have been sold otherwise.
The customers think they are getting  ‘Freemium’ business model is often used by
a package deal and will end up Web 2.0 and open source IT companies.
paying more money than they The user can unlock the premium features
intended. on payment of a licence fee, as per the
freemium model. Other software
manufacturers make all the premium
features available for a trial period after
which the software stops working.
.

43 44

11
 3/26/2025
Freemium Freemium
 To succeed with freemium, online digital companies need to achieve and sustain
 Reaching the right balance between free and premium offerings is crucial
the excellent value of their offerings to free and premium users by continuous
development and improvement of their value propositions, e.g. by better
for a freemium business. There is always a danger that too much will be
user interface, additional new features, further compatibility with other systems given away for free, thus eliminating the incentive for users to upgrade to
and solutions. the paid version.

LinkedIn spends one-fifth

of its revenues on R&D.
In January 2019 online music provider
This approach leads to
Spotify had 87 million paying
increased customer
subscribers and 191 million active free
loyalty, better customer
users.
retention and higher
switching costs. This is For revenue, Spotify’s free users can
especially important for stream unlimited music on their
freemium companies desktop, but need to listen to ads every
since switching costs once in a while, providing a revenue
might be perceived as stream of 10 per cent of their total
being low because their revenue. Users can also pay $9.99/
offer is free. month to eliminate the ads and stream
45
music on any or all devices. 46

Price changes Price changes

Initiating Pricing Changes
Price changes on existing products are called for when a new product has
been launched or when changes occur in overall market conditions (such
as fluctuating foreign exchange rates). Price cuts occur due to:

• Excess capacity
 If a decision is made to change prices, related changes must also be
considered. For example, if an increase in price is required, it may be • In the face of strong price competition or a weakened economy
accompanied, at least initially, by increased promotional efforts.
• Gaining market share or dominating the market through lower
 When reducing prices, this follows from the high probability that the existing
product is now less unique, faces stronger competition and is aimed at a broader
costs.
segment of the market. In this situation, the decision-maker will be forced to pay
Price increase from:
more attention to competitive and cost factors in the pricing process.
• Cost inflation
 The timing of price changes can be nearly as important as the changes
themselves. For example, a simple tactic of time-lagging competitors in
• Increased demand
announcing price increases can produce the perception among customers that
you are the most customer-responsive supplier. The extent of the time lag can • Lack of supply
also be important. A considerable amount of money could be lost during the
unnecessary delay in announcing a price increase. 47 48

12
 3/26/2025
Price changes Price changes

Buyer Reactions to Price Changes Responding to Price Changes

Price increases Price cuts

• Product is “hot” • New models will be

• Company greed available
• ………… • Models are not selling
well
• Quality issues
• …………….

49 50

Parallel importing and grey market goods

 Grey market goods are trademarked products that are exported
from one country to another and sold by unauthorized persons or
organizations.

 Parallel importing happens when products can be purchased in one

market and sold in another, undercutting the established market
prices in the process.

51 52

13
 Parallel importing and grey market goods
3/26/2025
Parallel importing and grey market goods
 Parallel importing, occurs when companies employ a polycentric,  Companies that are serious about restricting the gray market must establish and
monitor controls that effectively police distribution channels. In some countries
multinational pricing policy that calls for setting different prices in
they may get help from the courts.
different country markets. Grey markets can flourish when a product
is in short supply, when producers employ skimming strategies in
A Taiwan court ruled that two companies that were
certain markets, or when the goods are subject to substantial buying Coca-Cola in the United States and shipping it to
markups. Taiwan were violating the trademark rights of both the
Coca-Cola Company and its sole Taiwan licensee. The
violators were prohibited from importing, displaying, or
In the European pharmaceuticals
selling products bearing the Coca-Cola trademark.
market, prices vary widely. In the
United Kingdom and the
In other countries, the courts have not always come
Netherlands, for example,
down on the side of the trademark owner. The reasoning
parallel imports account for as
is that once the trademarked item is sold, the owner’s
much as 10 percent of the sales
of some pharmaceutical brands.
rights to control the trademarked item are lost. In a
The Internet is emerging as a similar situation in Canada, the courts did not side with
powerful new tool that allows the Canadian exporter who was buying 50,000 cases of
would be grey marketers to Coke a week and shipping them to Hong Kong and
Japan. The exporter paid $4.25 a case, plus shipping of
access pricing information and
$1.00 a case, and sold them at $6.00, a nifty profit of 75
reach customers.
cents a case. Coca-Cola sued, but the court ruled that
the product was bought and sold legally.
53 54

Parallel importing and grey market goods Parallel importing and grey market goods

 Parallel imports can do long-term damage in the market for trademarked A proactive approach to the problem of grey marketing is needed:
products. Customers who unknowingly buy unauthorized imports have no
assurance of the quality of the item they buy, of warranty support, or of  Seek legal redress. Although the legal option can be time-consuming and
authorized service or replacement parts. expensive, some companies (e.g. Seiko) have chosen to prosecute grey
marketers.
Purchasers of computers, for
example, may not be able to get  Change the marketing mix. This involves three elements:
parts because authorized dealers
have no obligation to service  Product strategy. This strategy is about moving away from the
these computers. In the case of standardization concept (same product for all markets), and introducing a
software, the buyer may be differentiated concept with a different product for each main market.
purchasing a counterfeit product
and will not be authorized for  Pricing strategy. The manufacturer can change the ex-works prices to the
technical support. Furthermore, channel members to minimize price differentials between markets.
when a product fails, the
consumer blames the owner of  Warranty strategy. The manufacturer may reduce or cancel the warranty
the trademark, and the quality period for grey market products. This will require that the products can be
image of the product is sullied. identified through the channel system.

55 56

14
 3/26/2025
Dumping Transfer pricing
Dumping is the sale of an imported product at a price lower than that Transfer pricing: The pricing of goods transferred from a company’s
normally charged in a domestic market or country of origin. operations or sales units in one country to its units elsewhere; also known as
(General Agreement on Tariff and Trade’s (GATT) 1979 antidumping code) intracompany pricing. In transfer pricing, prices may be adjusted to enhance
the ultimate profit of the company as a whole.
 Dumping is rarely an issue when world markets are strong. In the 1980s and
1990s, dumping became a major issue for a large number of industries when
excess production capacity relative to home-country demand caused many  The objective of the corporation in this situation is to ensure that the transfer
companies to price their goods on a marginal-cost basis. In a classic case of price paid optimizes corporate rather than divisional objectives.
dumping, prices are maintained in the home-country market and reduced in
foreign markets.  For obvious reasons, multinational companies would like to place as much
profit in countries with the lowest tax rates. In order to place as much profit in a
 For countervailing duties to be invoked, it must be shown that prices are lower certain country, the company should set a relatively low transfer price to the
in the importing country than in the exporting country and that producers in the subsidiary in the ‘low tax rate’ country.
importing country are being directly harmed by the dumping.
 Each country has its own set of laws and regulations for dealing with controlled
 Today, tighter government enforcement of dumping legislation is causing intracompany transfers. Although the applicable laws and regulations often
international marketers to seek new routes around such legislation. Assembly seem perplexingly inscrutable, ample evidence exists that most governments
in the importing country is a way companies attempt to lower prices and avoid simply seek to prevent tax avoidance and to ensure fair distribution of income
dumping charges. from the operations of companies doing business internationally.
57 58

Transfer pricing Coca-Cola entered

Vietnam in 1994, and
broke even only in
2013 despite double-
digit revenue growth,
according to the
department. Since the
company reported
accumulated losses of
VND3.77 trillion
($162.5 million) as of
2011, it was exempt
from corporate income
tax. HCMC has named
Coca-Cola among
businesses it suspects
of transfer pricing fraud
to evade tax.

Because global companies conduct business in a world characterized by different corporate

tax rates, companies have an incentive to maximize income in countries with the lowest tax
rates and to minimize income in countries with high tax rates. In recent years, many
governments have tried to maximize national tax revenues by examining company
returns and mandating reallocation of income and expenses.
59 60

15