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A firm located in New York State sells f. o. b. its regional sales branches to its domestic customers for all items that are regularly carried in stock, but f. o. b. factory for made-to-order items. In export it sells all orders f. a. s. New York City for freight f. o. b. New York for parcel post, but it gets very little made-to-order business from export customers. In any event the freight cost from factory to New York City is very small in relation to the value of the product. Now the average freight paid by the company on export business is less than the average paid on other business in New York City (because the domestic customer pays the freight on a larger proportion of the total business) but it is less than the average for all United States sales. But as all freight is a relatively minor item of expense, the company does not keep separate accounts for freight paid by domestic and export sales. And as a good part of the export shipments come out of stocks of the New York City sales branch, it would be no easy matter to allocate freight costs.

Another firm located near the eastern seaboard sells at one delivered price throughout the United States. Total freight costs on domestic sales is a rather significant item-about 12 percent of domestic sales. The company believes it is offering export customers the same conditions by quoting identical prices for export f. o. b. any port in the United States. Consequently, export shipments move out of New York, Philadelphia, Baltimore, Gulfport, Mobile, Key West, New Orleans, San Francisco, and Seattle, according to the locations of the export customer, available shipping facilities, and ocean freight rates. But because of the geographical concentration of the world's population and buying power, a larger proportion of the company's exports leave from the port of New York than the proportion of domestic sales which are concentrated around the area from the factory to New York. Consequently, while the company is offering the domestic and export customers the same inland freight facilities, its average freight bill per unit of sales is lower for export business than for domestic business.

Another firm located in the vicinity of New York sells to all customers, domestic and export, at the same price f. o. b. New York, but it allows freight on domestic orders of over $100. The purpose of this practice is to induce the customer to plan his buying so as to avoid the expense involved in many small shipments. In export there is no inland freight, and besides the customers plan their buying as well as they can without special inducement, because the distances in most cases prevent rapid delivery and they must be prepared to meet their needs out of stock.

These examples will make it clear that some more flexible formula is needed than an attempt to adjust prices for differences in the cost of freight included in the price. For once goods are sold on other than strictly f. o. b. factory terms, a multiplicity of complications are introduced. All kinds of stipulations are made to suit the peculiarities of the product, the domestic market, and the export market.

For the purpose of our price comparison, the following procedure was adopted. F. o. b. prices were used wherever they are the basis of varying price quotations. Where exports are sold c. i. f. the ocean freight and insurance costs were deducted from the export price to provide a basis of comparison with domestic prices. In all cases

where the producer offered the same conditions with regard to inland freight to export customers as to domestic, no price adjustment was made even though actual freight costs were not, as they could hardly ever be, identical. Furthermore, no price adjustment was made where the freight conditions were dissimilar if the purpose of the difference was to expedite business procedure. But a price adjustment was considered necessary where the special conditions offered to export or domestic customers was in lieu of a price concession.

Adjustment for Cost of Special Packing.

Ordinarily it is not difficult to make a price adjustment for the cost of packing. Where this cost is a sizable item, the manufacturer is well aware of the cost and knows whether the export price is sufficiently higher to cover the cost. In some cases the cost is so small in relation to the value of the product that the manufacturer prefers to ignore it, and we have accepted his judgment. For example, in shipping adding machines packed three in a case, one firm slips the regular package into another case for export shipment. The value of the three machines is well over $100 and the extra case costs less than 25 cents. It hardly seems reasonable to consider this a price discrimination. In fact, the manufacturer said that he did not add the cost to the export price because it never occurred to him to charge for the extra container.

Some cases present complexities. A lightweight product is sold in the domestic market and in many export markets in a paper-board container that weighs almost as much as the product itself. The manufacturer's price covers the product and container. In some export markets duty is assessed by gross weight, and the product of this company plus container would have to pay almost twice as much duty as the products of competing manufacturers which are sold without containers. Hence, the price in those export markets would be too high to attract consumers. The company, therefore, ships to dealers in those countries without containers and gives them an allowance which approximately covers the cost of packaging in the dealer's country. As the dealer in each country only packages a small volume in comparison to the output of the firm itself in the United States, his cost per package is larger than the cost in the United States so that the net to the company is lower on sales of this product to those countries. We did not, however, count this as a reduction in the export price. Another firm sells its product unpackaged for export and gives a large allowance for the purpose of meeting foreign competition. The allowance is much larger than the cost of packaging, here or abroad. In this case we did count the export price as lower than the domestic price. Comparing Prices Quoted to Similar Types of Buyers.

This provision is very difficult to apply in some cases and impossible to apply in a few instances. When the firm has some customers of the same type in the domestic and export market, the prices to identical types of customers can be compared. But when there is no equivalent of the domestic type of customer in export markets and vice versa, the comparison of prices is not a simple matter.

In the first place the division of the distributive function among retailers, wholesalers, and distributors that is a characteristic of the

United States, simply does not exist in many parts of the world as, for example, in many Latin American countries. The distributive function may be divided between importers and merchants, but the importer may sell direct to the consumer as well as to nonimporting merchants, or he may sell only to the consumer. The American producer, who does not have extensive field representation, may not even know what functions these foreign customers perform, and he is apt to classify them as wholesalers without much investigation. We did not challenge the classification of customer which the firm found it necessary to make.

But real difficulties arise in the following types of cases. A domestic manufacturer maintains his own retail branches in the United States. All his domestic sales are direct to consumer, but export sales are to wholesalers and retailers. The expense of maintaining the retail branches varies from about 33 to 47 percent of the branches' sales and, of course, the total varies from year to year according to the total volume of business and the sales of each branch. If the discount offered to export customers was an approximation of the average cost to the company of the selling function we counted the prices as identical, but if it was consistently larger we counted the export price as lower than the domestic.

Another firm sells in all the heavily populated areas of the United States through retail branches but appoints exclusive dealers for a few thinly populated areas. The discount which the firm must give these dealers to induce them to stock and sell the product is, of course, based upon a realization of the costs of doing business in thinly populated areas and is larger than the actual costs of the company's retail branches located in heavily populated areas. The company also sells abroad through exclusive dealers and grants them the same discount as is given the exclusive dealers in the domestic market. Now obviously the net return on exports is lower than on domestic business since the costs of the company's retail branches are less than the dealers' discount. We did not, however, consider that this procedure involved a price concession to the export customer.

Equal Credit Terms to Domestic and Export Customers.

In a large majority of the cases covered in the field survey, it was found that longer terms are extended to export customers than to domestic customers. In general, the longer extension of credit is designed to cover the longer time required for shipment of goods and transmission of documents. The time that the export customer has possession of the goods without payment is generally no longer than the time a domestic customer would have them. In almost all cases the cost involved in this longer extension of credit is absorbed by the shipper. If the absorption of this cost were to be considered a price concession on exports, then almost all cases which would otherwise have identical domestic and export prices would have higher domestic than export prices. As this would not be a useful distinction for the purposes of this study, such differences in credit terms were ignored in making the price comparisons. In a few cases, however, very long credit terms of 6 to 9 months are extended to export customers where domestic customers are limited to 30 days, and the purpose is to give an added inducement to the export customer. As this extension of credit is in lieu of a price concession, we did consider that

an adjustment of the export price in these cases was necessary. It so happened that in the cases covered all those which extended unusually long credit terms also made actual price concessions in export and, therefore, would have been classified as having lower export than domestic prices regardless of credit terms.

These illustrations are sufficient to indicate that there are many difficulties in the way of a strict adjustment of prices for all differences in cost, although they do not preclude the drawing of reasonable conclusions. Even if one considered that that principle should be rigidly applied, it would be necessary to adopt certain simplifying statistical procedures as indicated above. But as a comparison of prices must be made in accordance with actual business practices, situations occur which leave some doubt as to the applicability of the principle itself. It is not that costs in these cases are indeterminate, but that the relevancy of adjusting prices for differences in cost is itself doubtful.

In many cases, the distinction between domestic and export sales is an artificial one from a business standpoint. One might find that the relative costs of many items of expense were different for export than for domestic business, due entirely to accidental factors. In fact, the same type of cost differences would be found between different areas of a company's operations within the United States. For example, a sales branch in one of the densely populated eastern States might have relatively lower costs than that in a western territory. Similarly, it might be relatively more or less expensive than a Latin American branch. And yet, if all the branches of the company were charged at the same price by the factory, it would seem only common sense to consider domestic and export prices equal.

It is generally with regard to selling costs that it seems inapplicable to adjust prices for all cost differences as between domestic and export operations. A typical example is that of a firm which advertises in the domestic market where the bulk of its sales are concentrated but does not advertise in its far-flung export markets, each of which absorbs only a small share of its total sales. This company sells its product for the same price f. o. b. factory to all customers, foreign or domestic. If one were to adjust the domestic price for the difference in advertising cost, the net result would be that the export price would be higher than the domestic price, which would seem to be an unreasonable conclusion. The procedure followed in this study was to ignore differences in cost of this type. Another firm, however, does its own advertising in the domestic market but grants an advertising discount to its exclusive distributors in foreign markets. The invoice price to its export customers is, therefore, lower than the domestic price by approximately its advertising cost in the domestic market. În cases of this type we also considered domestic and export prices to be equal.

Situations such as these indicate that prices should not be adjusted for all differences in costs. With strict adherence to the principle of cost equality it is improbable that any cases of equal domestic and export prices could be found. Thus, in order to yield more reasonable conclusions the comparison of prices in this study was made on the basis of an approximation of the factory net back on domestic and export sales approximations such as are used by business itself. The problems mentioned above are of a conceptual character, but

there are others more statistical in nature. These examples were concerned with the question of when an adjustment of invoice prices was necessary to insure comparability. For each of them had only one factor which had to be taken into account; that is, the terms and conditions of sale were substantially identical except for one significant difference for which an adjustment could be made on the basis of the difference in costs. But most cases present many differences in the terms and conditions of sale and many differences in the cost to the company of supplying identical services for domestic and export business with the cost differences being larger for export on some items and larger for domestic on other items. For example, a firm sells in the domestic market f. o. b. factory at 2/10 net 30, at three different prices to consumers, retailers, and wholesalers, gives quantity discounts on some items, has salesmen working on salary and commission, maintains branch sales offices in some localities, does considerable advertising, and gives its customers technical advice and engineering service when necessary. For export it sells at domestic prices f. a. s. New York, boxes for export without charge, gives credit terms up to 90-day-date draft, has a few traveling representatives to stimulate the foreign dealer by showing him how to market the product, has a few special discounts to exclusive representatives in certain export markets, does no advertising abroad, has certain special expenses such as cables, freight forwarder's fees, consular fees, pays commissions to foreign agents, but offers no technical or engineering services in export markets and no quantity discounts. It can be seen that the task of adjusting domestic and export prices for all these differences would be enormous, especially when the cost of any one item is not substantial enough for the manufacturer to consider a price difference warranted on the basis of it. The problem is further complicated when, as in inany cases, the manufacturer does not sell at uniform prices for export but has different prices in different markets depending upon costs or local competitive conditions.

As a practical matter, therefore, the procedure of comparing prices must be simplified to statistically manageable rules. The following method was used in this study:

Where invoice prices were the same for the same types of customers, domestic and foreign, and there was no individual difference in terms and conditions of sale or costs of doing business substantial enough by itself to make the net return different, we counted prices as identical. Where invoice prices were different and the differences were due to specific adjustments for differences in the cost of doing business, we counted the prices as identical. Where invoice prices were different but the difference was due to market conditions, the export price was counted as lower or higher as the case may be. Where prices were the same but there was a substantial difference in the costs of doing business or the services included in the price, export prices were counted as higher or lower as the facts indicated.

An actual computation of the degree of difference in prices for even a small sample would have involved a heavy cost and considerable time, which seemed inappropriate to the purpose of the report. All that was done, therefore, was to determine if export prices were higher or lower than domestic prices.

Another complication arises in the fact that many firms sell a variety of products to many foreign markets, and their price policy is not the

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