INTERNATIONAL PRICING COST Full = fix + variable costs. By definition, a short-run approach since fixed cost might become variable in the longer run. The main attraction of this approach is its flexibility especially when the cost components change. Example: The parent might lower the price it charges to a subsidiary. When the cost of inputs measured in foreign currencies fluctuates. Buying Power is a key consideration. Sometimes in low per capital income countries, companies downsize the product (smaller volume e.g., less pieces of chewing gum) or even lower the quality.

Examples 1. Variations in trade margins and the length of the channel. 2. The balance of power between manufacturers and retailers (e.g., large- scale retailers in Europe). 3. Parallel import (gray markets) which exploit cross-country price gaps, importing from low price countries to high price countries. The deals are handled by unauthorized distributors. 4. Government interventions – luxury and sales taxes, value added taxes, minimum prices (to support local industries). Also, policies vis-à-vis unemployment, interest rates, inflation, etc., indirectly influence prices. Likewise – currency movements (e.g., strong US dollars). 5. Countertrade – the benefits include gaining access to new or difficult markets and overcoming exchange rate controls or difficult markets.

Smaller companies are more inclined to use the average industry price in international setting because they have less latitude when determining product prices. Regulations as to the “fairness” of the transfer price are also important. * The full costing method includes the fixed cost in the cost per unit calculations. The premise of the incremental cost method is that no additional fixed costs will be incurred if additional units are produced.

DRIVERS INFLUENCING PRICE DETERMINATION EXPORTERS: 1. Excess capacity. 2. Emergency purchase by foreign market. MNCS:Sales to Non-affiliated Buyers - Buyers needs, tastes, buying power, income an price elasticity - the ability to differentiate the product via advertising or warranties and after-sale service. - Local income, taxes (home & host countries), rates of inflation, competition, government regulations regarding pricing (price controls), tariffs and/or custom duties, levels of market integration (e.g., Europe). - Divisional performances and evaluation techniques (profit centers). However: A parent may prefer to have profits accrue to its subsidiaries in lower tax rate areas (and show losses).

TRANSFER PRICE TO WHOLLY OWNED FOREIGN SUBSIDIARY Three important factors: 1.Competitive Market Prices: Including competitor’s list prices or bids. 2. Costs: Including production costs, physical distribution costs, foreign and domestics tariffs, and corporate income. 3. Legal restrictions: Including political policies, governmental controls and foreign laws against such practices as price discrimination and dumping. If the purpose of transfer pricing is to provide profitability data-look at the opportunity cost and base the transfer price on the competitive market price (or best estimate). If the purpose of transfer pricing is to assist management in setting the cost floor for prices of the end product or to shift profits to the foreign operation the use of cost is desirable as a methods to determine the transfer price.