Determinants of Export Prices

A number of variables influence the level of export prices. Some of these are internal to the firm; others are factors that are external to the firm. A major internal variable is the cost that is to be included in the export price. The typical costs associated with exports include market research, credit checks, business travel, product modification, special packaging, con­sultants, freight forwarders, and commissions (Anonymous, 1993). An additional cost is the chosen system of distribution. The long distribution channels in many countries are often responsible for price escalation. The use of manufacturers’ representatives offers greater price control to the exporter. Another internal variable is the degree of product differentiation, that is, the extent of a product’s perceived uniqueness or continuance of service. Generally, the higher the product differentiation a firm enjoys, the more independent it can be in its price-setting activities.

The external forces that influence export pricing include the following:

  • Supply and demand: The pricing decisions for exports are subject to the influence of the supply of raw materials, parts, and other inputs. In a competitive economy, any increase in demand is followed by a higher price, and the higher price should, in turn, moderate demand. It is often stated that exports of manufactured goods exhibit the same price characteristic as primary products, their prices varying with the state of world demand and supply (Silberston, 1970). The classical supply-and-demand approach— whereby price acts as an allocating device in the economy and supply equals demand at an equilibrium price—is largely based on certain assumptions: perfect buyer infor­mation, substitutability of competing goods, and marginal cost pricing. The classical assumption that reducing prices increases demand ignores the interpretation of price changes by buyers. Studies have shown that consumers perceive price as an indicator of quality and may interpret lower product prices as a sign of poor quality (Piercy, 1982). If a product has a prestigious image, price can be increased without necessarily reduc­ing demand.
  • 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. Goods that deteriorate in high-humidity conditions require special, more expensive packaging. For example, engines that are to be exported to countries in the tropics require extra cooling capacity.
  • Economic policies such as exchange rates, price controls, and tariffs: Exchange rate depre­ciation (a drop in the value of a currency) improves price competitiveness, thus lead­ing to increased export volumes and market shares. For example, in 1984-1985, when the dollar had appreciated to roughly double its 1980 value against the German mark, luxury German cars were selling for lower prices in the United States than in Germany. In export markets where buyers are used to negotiating prices, a flexible price is prefer­able to one that uniformly applies to all buyers.
  • Government regulations in the home country: Different regulations in the home country have a bearing on export pricing. For example, U.S. government action to reduce the impact of its antitrust laws on competition abroad has enhanced the price competitive­ness of American companies.

Source: Seyoum Belay (2014), Export-import theory, practices, and procedures, Routledge; 3rd edition.

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