are comparable, the following conditions should be fulfilled, or appropriate adjustments in the quoted prices should be made.

(1) The price comparison should be made for products which are identical. If there is any special manufacture required for exports, the cost must be added to the price.

(2) The comparison should be of prices quoted on the same date or during a period in which neither the domestic nor the export price changed. Using the date of shipment can be misleading, for there may have been a price change since the sale was made.

(3) Any rebates to the producer from duties or excise taxes paid must be deducted from the export price; or if exports are exempt from such taxes, their price should be lower by the amount of tax.

(4) The comparison should be made on an f. o. b. factory basis with all freight allowances deducted.

(5) The cost of extra packing required for export should be allowed for in the export price.

(6) The comparison should be made between prices quoted to similar types of customers in the domestic and foreign markets; i. e., both prices should be prices to wholesalers, to distributors, to retailers, or to other manufacturers. It would obviously be incorrect to compare a price to retailers in the domestic market with the price to wholesalers in the export market.

(7) The price comparison must be made for orders of similar size.

(8) If the credit risk is greater in either market, it should be allowed for in the price.

(9) If engineering or other services are supplied without charge in the domestic market and not abroad, the cost of such services should be deducted from the export price.

(10) Differences in advertising and selling costs should be allowed for in the price.

(11) Differences in quantity discounts or credit terms offered to customers in both markets should be considered to be differences in prices.

If commodity prices, adjusted for all of the foregoing factors which were applicable, could be obtained, they would provide an accurate basis for comparing domestic and export prices and determining in which cases export prices were higher, lower, or identical with domestic prices. In other words, it is the factory net, or mill net, on domestic and export sales that should be compared. Such adjusted prices represent what might be called the ideal basis of comparability. This conception of ideal comparability obviously derives from the conditions which prevail under highly competitive conditions. In an industry which approximates a condition of pure competition one finds that virtually every productive operation and every distributive service required to produce the commodity and get it into the hands of the consumer is performed by a different group of individuals or business concerns, insofar as a division of functions is technically feasible. Each functional group of individuals or firms adds only one link to the productive process and, therefore, each function is individually priced. A buyer pays only for that combination of functions which he requires. In some cases where one individual performs several functions there are competing groups who are willing to render each of the several services so that the buyer has a standard of comparison that enables him to evaluate the worth of the combined services offered him. Each service in the entire chain has its price and it is quite simple to compare the prices which various buyers, such as domestic and foreign, pay for each service and to see if they are equal.

It is, of course, in the standardized, or accurately graded, commodities which are produced by a large number of unorganized producers

and sold to a large number of unorganized buyers that one finds the nearest approach to the concept of pure competition. The organization of the productive and distributive process of wheat, cotton, apples, and truck crops are typical examples of a high degree of competition in the contemporary economic system. The farmer concentrates his attention almost exclusively on one function-growing the crop. If he also delivers the product to the railroad station, local grain elevator, or nearby city market, he performs this service for his entire productall customers get the benefit of it. The selling function is undertaken by independent commission men, and the price of this service is determined independently of the farm price of the product. The major transportation function is performed by another group of individuals and is priced independently of the previous services. And so on through the entire process each function-storage, grading, milling, financing, and so forth-has a distinct group of individuals offering only one of the services which the final user pays for when he buys the product delivered to his place of business. The price of each service all along the line is independently determined and is well known. The user has the privilege of entering the productive process at any stage and of paying only for those functions that have actually been executed. The price of wheat is lower in Chicago than it is in New York because the New York price must include the cost of transportation from Chicago to New York, which is fixed and paid for independently of the price of the wheat without transportation. A buyer in Buffalo will not pay the New York price because he has the alternative of buying in Chicago and shipping to Buffalo at a total cost which will be less than the New York price. Similarly, the price of flour is higher in 1-pound bags than it is in barrels because there are millers who perform only the one function while others perform both, and the consumer has the opportunity of buying from either. Thus, putting the flour into 1-pound bags is an independently priced function. The differentiation of function which arises from a multiplicity of producers and a multiplicity of buyers acts to establish an independent price for each service in the productive process, and thus makes possible a comparison of prices between markets for exactly the same group of services.

Not all agricultural products exhibit this minute separation of functions, because there is a high degree of concentration either of selling or buying at some point in the distributive system. And, of course, in most manufacturing industries the productive process is highly integrated, even in what is usually thought of as nonintegrated industries, so that the buyer at any stage in the production-distribution process is offered a variety of services with little choice of specifying precisely those which he wants. Generally speaking, the nearer the product gets to the ultimate consumer, the more functions are tied up in the price and the less choice the buyer has of sorting out and paying for the exact functions that will meet his needs.

For example, a department store will generally offer the buyer a commodity at a price which includes a charge-account privilege, gift packaging, free delivery, and exchange services if those are desired, but does not give a special price to the customer who takes none of these services. Similarly, many manufactured products are priced to include a variety of services and often no allowance is made if the buyer does

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not avail himself of the services. The export price may be set to include a somewhat different group of services and it may be impossible or impracticable for even the manufacturer to compare the two prices by trying to make the two groups of services equal. There is no independent price for each service, and it is often impossible and meaningless to assess a monetary value for it.

It might seem that, although the combined services included in the selling price are not priced independently, they must have separate and determinate costs, and that a comparison on the basis of costs would be feasible. But the costing problem is highly complex. In some cases it is impossible to allocate costs, except by arbitrary methods which have no reality but in the accountant's mind, while in other cases the expense of doing so would be greater than any benefit the businessman could derive from the expenditure. These two difficulties, joint cost allocation and the expensiveness of costing minor items of expense, interpose serious obstacles in the way of a statistical application of the conditions previously listed as requirements of price comparability. A brief discussion of the difficulties encountered in applying some of these conditions will illustrate the nature of the problem.

Differences in the Domestic and Export Products.

In many cases a manufacturer must adapt his product to meet the needs of various export markets. The right-hand drive on automobiles, keyboard adjustments on typewriters, foreign-language labels on pharmaceutical products, and different-colored bands on hats are interesting examples. Any of these changes must involve some addition to costs, but just when the charge is substantial enough to warrant an addition to the price is something that even the manufacturer cannot always answer. The automobile companies regularly charge extra for right drive; the typewriter companies do not charge for keyboard adjustments; the hat manufacturer does not charge for style adaptations; one pharmaceutical house computes the cost of manufacture of foreign-language containers, while another pastes a label in the appropriate language over the English printing and does not charge for this service. In some cases the adaptation of the product involves a cost large enough to be allocated and added to the price, but in other cases the added cost is too small to bother with. Even where the manufacturer knows that the cost is substantial. it is not always computed separately, for in some instances the foreign market price will not allow the extra cost to be added to the domestic price.

The rule adopted in this study has been to accept the manufacturer's estimate of the cost of special manufacture. If he considered the cost substantial, then it was assumed that he should make a price adjustment for it, and that if he did not adjust the export price he was then offering a lower price for export. Costs that were too negligible for the manufacturer to conceive as warranting a price adjustment were ignored for the purpose of the price comparison.

In some cases the firms make an entirely special product for the export market. The short-wave radios manufactured for the Latin American market are a conspicuous example. It was found that the manufacturer usually knows whether the profit margin included in the price of such products is larger or smaller than the customary margin in his domestic product. The export price was counted as higher if

the profit margin (in percentage terms) was larger, and lower if the profit margin was smaller.

Some situations, however, present difficulties which defy solution in such simple terms. The problem of a manufacturer of black and galvanized pipe fittings, among other things, is an interesting one. Pipe fittings are made in a very large assortment of styles, shapes, and sizes and the entire assortment is made in two thread styles, American and British. In the domestic market only the American thread is used, while both American and British threads are exported. A domestic and export price comparison for the American thread fittings presents no peculiar difficulties. But how is one to compare the export prices of the British style fittings with the domestic prices of the American? While both types include the same range of shapes and sizes, the price structures are entirely different. The British thread price structure originated with European manufacturers and an American producer must meet those prices if he is to get any business. The two price. structures differ in that the price range of any particular product (as an L or union) from the smallest to the largest size is much greater for the British than for the American thread. The smaller sizes are cheaper and the larger sizes dearer for the British than for the American thread. The smaller sizes are produced and used in much larger quantities than the larger sizes-this larger production undoubtedly being the reason for their low prices in the British thread price structure. But the American producer believes that if he sold only small sizes at the Brititsh thread prices he would lose money, and if he sold only large sizes the profit would be substantial. Of course, a manufacturer must offer the whole range of sizes in order to meet the needs of his customers. It would obviously be very difficult to compare the two price structures even if one made the simplifying assumption that factory costs for the same size of a product were identical (which is not at all likely because they are produced in different quantities). The weighted average price in relation to weighted average costs would have to be the basis of comparison, but these averages would change from day to day or month to month as different quantities were produced and sold. And with the tremendous variety of shapes and sizes involved the expense of detailed record keeping would be prohibitive. An additional difficulty is the fact that the price changes in the two systems do not occur at the same time and are not always in the same direction as one arises from European conditions while the other arises from American conditions. All things considered, one must agree with the manufacturer that the British and American thread prices are not comparable. Comparison of Prices Quoted on the Same Date.

There is ordinarily no problem in obtaining domestic and export prices as of the same date. In some cases, however, frequent price changes are usual in the domestic market; new price lists are sent out once a month. Such frequency may not be possible in the case of exports where customers are spread out to all the corners of the earth so that new export price lists are sent out only once a year or whenever major price changes occur. At any time, therefore, export prices may be somewhat above or below domestic prices, or some above and some below. These cases were not considered as differences between domestic and export prices unless the one was consistently above or below the other.

Rebates on Duties and Excise Taxes Paid.

There is little difficulty in applying this condition. Of course, the drawbacks are sometimes so small in relation to the value of the product that they are ignored in the determination of the export price. The excise tax on cigarettes and automobiles makes a sizable difference in the price of those products, and the omission of the tax on exports must be taken into account in comparing prices. But a manufacturer of a pharmaceutical product, which wholesales at about $8.50 per dozen, might or might not pass on to his export customers the drawbacks on sugar and alcohol taxes which amount to only 21 cents a dozen. We did not count an item which was only a negligible percentage of the value of the product if the manufacturer did not deduct it from the export price as a difference in price for the purpose of the price comparison presented in the following chapter.

Price Comparisons on an F. O. B. Factory Basis.

In more than two-thirds of the cases that were examined prices were quoted some other way than strictly f. o. b. factory. A few manufacturers who sell f. o. b. factory to the domestic trade quote the same prices f. a. s. New York to export customers. Such a practice clearly involves a price concession for export business when the factory is not located on the seaboard. Other cases in which export prices are quoted f. a. s. or c. i. f. according to the custom of the trade, but in which the exact amount of the inland freight is added to the f. o. b. factory domestic price, are clearly cases of no difference in prices. But all other cases present more or less difficulty.

The difficulty arises because of the variety of freight allowances that may be included in the price, because the freight costs may differ for almost every customer the firm has, and because there is so much difference in the relation of freight allowed to value of product. In a few cases freight costs are so high that the manufacturer must keep accurate account of his costs to customers in various locations and adjust prices for differences in freight costs. For example, a producer in New Orleans selling at one price delivered in the United States has a total freight bill of 20 percent of receipts from domestic sales. In order to get export business, his f. a. s. New Orleans export price is 20 percent less than the domestic price. Since we are here concerned only with differences between domestic and export prices and not with discriminations in the domestic prices themselves, we counted domestic and export prices as identical in that case.

But where freight costs are not so large a proportion of selling price and the difference between export and domestic freight costs not so conspicuous, a neat adjustment of prices is usually impossible. A few examples will show the complications involved. Some firms located on or close to the Atlantic seaboard have zone prices for the domestic market; the price for each zone includes freight to any point within the zone. The zone 1 price is offered to export customer's f. a. s. New York. Now the precise costs of freight to all customers in zone 1 may be more or less than freight costs from factory to steamer side in New York, and it may vary continually according to the flow of sales in the domestic market. Furthermore, the differences between the domestic zone prices may not be exactly equal to the difference in average freight costs between the zones.