on an f. o. b. basis, export prices too differ for almost every point to which shipment is made.

The export corporation pays all the expenses connected with the export business and turns over the net receipts from sales to the producing companies. Likewise, the producing companies pay all the costs of domestic distribution. Costs are higher for export, even deducting freight costs in both cases, because selling and other costs are higher on the export business.

It would, therefore, be inappropriate to compare the whole scale of f. o. b. domestic prices with the whole scale of f. o. b. export prices. Furthermore, as there is discrimination, in a sense, involved in selling at uniform delivered prices in both domestic and export markets it is the average net realization on domestic and export business which must be compared rather than the net realizations for individual transactions. Of course, production costs per unit of output must be considered the same regardless of destination.

The producing companies in this case report that the average net realization (or the net price in our sense) is somewhat higher on export sales than on domestic sales.

Type 2.

No standard export price; accept export business only when price is equal to or above domestic price. Export price policy in the cases of this type can be described as follows: Export prices are quoted on a c. i. f. basis. Foreign sales involve higher costs than domestic business-apart from transportation costs-for such items as export packing, special handling, longer credit terms, larger selling commissions, etc. Furthermore, there is no standard or list export price, but prices are quoted for almost each transaction as the business is of that character. Export business is not accepted at a c. i. f. price which does not cover all the added costs of export and yield a net at least as high or higher than its domestic price.

Three cases with entirely unrelated products were found to have a price policy of this type. In fairness to the concerns involved the products are not described very specifically in order to avoid disclosing information to competitors. Suffice it to say that, in general terms, the products of the three concerns respectively are a silk textile prod uct, a wood-pulp product, and a related group of chemical products. The following example is illustrative of the cases of this type:

Example 3.-This firm produces a wood-pulp product that is sold to industrial consumers for further fabrication-craft board for shipping containers. In the domestic market the company sells directly to manufacturers at a uniform delivered price. Prices are generally announced quarterly and contracts drawn to cover the business for the coming quarter. It is very seldom that prices are changed during the quarter.

Its export sales are made through commission agents on a c. i. f. basis. There is no fixed price for export as the price is always reached by negotiation between the company and the customer through the agent. As the mill is located on tidewater there is no inland freight on export shipments but there are extra costs for export packing, agent's commission, ocean freight and insurance, handling documents, cables, etc. The management will not confirm a c. i. f. price which

does not at least cover these costs for the shipment plus the average net realization (average f. o. b. price) on domestic sales. But it often obtains export orders at prices higher than this minimum.

At the present time the company is exporting approximately 10 percent of its output to various customers in five foreign countries at a different f. o. b. price in almost each case. The lowest is just about equal to the average f. o. b. mill realization on domestic sales while the spread from the highest export price to the lowest is roughly 16 percent. On the average, export prices on an f. o. b. basis are 7-8 percent higher than the average domestic net realization. Type 3.

List prices for export higher than domestic prices. One other type of price policy was found among the cases having higher export than domestic prices. The remaining four cases in group I were all of this type, involving producers of electrical products-radio receiving sets and electrical refrigerators.

For group I, type 3, products are sold from price lists which are identical for all customers in the domestic market of the same class; that is, all distributors or wholesalers or retailers, etc., are issued the same price list and all sales are made at the prices shown thereon. The same procedure is used in export markets. Export price lists are issued and all sales are made according to those prices. While the prices on the export price sheet may be the same as those on the domestic price sheet for a few items, for most items or models the export price is higher. These differentials in list prices are not related to differences in costs. In fact, in those instances where clear answers could be obtained, distribution costs on export business were lower than on domestic business. The following example is illustrative of cases of this type.

Example 4.-The products in this case are radio receiving sets and radiophonograph combinations in a wide variety of styles and models. The company also manufactures other lines of products which have entirely distinct uses and which are sold by distinct merchandising departments. As the price policies for the different lines of products are entirely unrelated, the radio department of the company is considered here as a separate case for the sake of clarity.

In the domestic market the products are sold only to wholesale distributors from a uniform price list f. o. b. factory. The domestic business is a package business; that is, there is no adaptation of the product itself to fit the peculiar requirements of the wholesaler. There is a wide variety of models to fit the needs and purchasing power of the consumer but all the units of a particular model are exactly the same and they are all sold complete and packaged just as they come off the assembly line.

A large part of the export business is of a different character and many complications arise because the products must be adapted to meet the special requirements of many markets. In the first place, a line of export models not sold in the domestic market is produced to fit the reception conditions existing in many foreign markets. But even the same models which are sold in the domestic market must often be adapted for the export trade. These adaptations are of two kinds, physical and economic. The physical are required primarily to meet different voltages than those standard in the United States, while

the economic adaptations are required to meet the peculiarities of tariff laws country by country. Because of tariff laws, often designed to encourage some part of the manufacture or assembly being performed locally, shipment must be made in all manners of special packaging and various stages of assembly. For example, it may be necessary, in order to avoid a duty of prohibitive cost, to ship the receiving set without cabinet and allow the foreign distributor to procure cabinets locally; to ship tubes in a separate package; to ship only the major parts and to have the assembly done locally; certain parts made of or containing metals dutiable at a higher rate may have to be excluded or shipped separately, etc., in an endless variety. Nevertheless, a considerable portion of the exports are shipped right from the assembly line, just as in the domestic market.

Much of the export business, therefore, requires special pricing either because there is no corresponding model sold in the domestic market or because manufacturing costs are lower or higher through the exclusion of certain parts or through the complicated special packaging that is needed. The management states that on all this business the gross-profit margin-that is, the difference between factory costs and price is higher than the gross-profit margin on domestic business. This means, in terms of the concepts useful for our problem, that export prices on this class of business are higher than domestic prices for dissimilar but comparable commodities.

The remaining export sales are made from standard export price lists. A part of this business also requires special packaging, and while this does increase factory costs, the increase is too small to be added to the price and is merely offered as an accommodation to the customer. But a significant share of export sales are of products identical with those sold in the domestic market. A comparison of domestic and export prices to distributors shows the export prices to be almost consistently higher from about 50 cents to $3 per set. The average differential between the list prices for export and domestic sale is about 3 percent. The price difference is not a specific adjustment for any difference in costs but is an arbitrary addition to the domestic price.

Certain other differences between domestic and export price policy should be noted. Domestic sales are f. o. b. factory while export are f. a. s. The inland freight costs are quite small but they are absorbed by the company. The domestic distributor is given a specified advertising allowance which appears on the domestic price list, for each set purchased but such automatic allowances are not granted to export customers. The company, however, gives specific allowances where the market requires or justifies the expenditure. The export customer is given a small quantity discount for volume purchases in order to induce larger shipments, but domestic prices are not subject to a quantity discount. Credit terms in export are adjusted to the longer distances involved. If list prices could be adjusted for all these differences it is hardly likely that the relationship of domestic and export prices would be changed.

In order to fully adjust prices, however, account must be taken of the difference in selling costs. The management reports that selling costs in the domestic market are proportionately much higher

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than on export sales. The company's expenditure for advertising, salesmen, and field representatives is much lower abroad. Thus the difference in prices adjusted for all differences in costs would be substantially greater than the 3 percent difference in list prices.

Accounting records are kept separately of the net profit margin on domestic and export sales and it is consistently higher on exports. In fact, in many recent years the domestic sales department has shown an operating loss while the export department has earned a profit.

In the other three cases of this type there are no essential differences from the facts in the above example with regard to price policy or profit comparison.

GROUP II. CASES OF EXPORT PRICES EQUAL TO DOMESTIC PRICES

In 21 cases out of the total sample of 76, export prices were equal to domestic prices. It is, nevertheless, possible to distinguish several types of price policies or pricing methods among these cases. When invoice prices, however, are adjusted for the specific cost items represented in different terms and conditions of sale it is found that the basic prices are the same whether the sale is domestic or foreign. The profit experience in these cases also differs between the net profit on domestic sales as a whole and export sales as a whole. It will be recalled that this comparison of net profits can measure differences in the costs of doing business which, from a business standpoint, cannot be taken into account in price making. Since these are not significant cost differences, the profit differences are not substantial. Type 4.

Market price plus distribution costs for all customers. The first type of price policy in this group was found to be followed by four cases (each a separate firm or group of firms) in which the products were standardized or accurately graded commodities. These commodities have prices which fluctuate from day to day according to conditions of the market or according to the fluctuations of a basic raw material quoted on an organized commodity exchange. The firms in these four cases were processers of packing-house products, flour-mill products, canned fruits and vegetables, and certain dairy products, respectively. While these products bear the name of the producer, the brand is relatively unimportant in the price-making process on wholesale business. The buyers are well acquainted with the market, they always have alternative sources of supply, and they buy according to specification, grade, or sample. The buyer almost always asks for a quotation which includes delivery to his establishment but he always has the alternative of buying f. o. b. the processing establishment.

In these cases there is no essential distinction between domestic and export business. The company sells only at the market price and while price quotations are made by salesmen in the various domestic and foreign sales division for all sorts of terms and conditions of sale all these quotations are based upon the f. o. b. market price at the processing establishment. As accurately as they can be calculated, the exact costs involved in any sale on any other than f. o. b. factory cash basis are computed and added to the f. o. b. price to arrive at the delivered price. Most price quotations are not made f. o. b. factory

but (e. g.) f. o. b. cars in New York or other United States cities; f. a. s. New York or San Francisco, payment against documents; c. i. f. some foreign port, payment on first presentation of papers; etc. But in each case the domestic or export sales division or branch must calculate the costs involved, including selling expenses on that type of business, so that the f. o. b. net at the processing establishment will be equal to the market price on that day.

The firms in these cases are engaged primarily in a staple commodity business and the price policy conforms more precisely than any other cases in the sample to the picture described as existing under conditions of pure competition where there is narrow differentiation of functions. The cost of each function or service is computed as accurately as possible and any service rendered on a particular sale is reflected in the invoice price at which that sale is made. The company's profit is made in the processing of the product, and details of distribution are on a cost basis. Each sales branch or division needs only cover its costs plus the market price of the product.

This description of the price policy is not meant to imply that the net return on every single transaction at a particular time is exactly equal. The marketing process cannot function with such accuracy. But the fluctuations above and below the market price are in the nature of random fluctuations and not due to conscious policy. It might be said that these differences are due to imperfections of the market and uncertainties as to the actual cost of a particular function. There is no distinction in this regard between domestic and export sales. For all practical purposes domestic and export business are equally profitable.

In several of these cases the producers also market highly advertised branded products more or less similar to those sold as commodities. Although costs are higher, the profit margin is larger for the branded than for the commodity business in the domestic market. These branded products are seldom exported as there is no demand abroad for justifying the existing differential over similar nonbranded products. The small export shipments appear to be for the use of Americans residing abroad and are made at domestic prices.

It might be noted that the profit margin on sales in these cases is quite small and general overhead is not a large proportion of total costs in comparison with many manufacturing firms. Thus almost every item of expense is a significant item from a business standpoint and cannot be neglected in making a price quotation.

Type 5.

Factory price plus distribution costs for all customers. This type of price policy is, from outward appearances, similar to type 4. It varies in that the price is not established by some organized market, but the basic f. o. b. mill prices of the company's products are set by the administrative and production officers. These internal prices include profit and all cost items except selling and distribution expenses. These mill prices, which are issued confidentially to the various sales departments, include factory costs, designing, general administrative overhead, and profit. The various sales departments of the company, each of which serves a different type of customer, are charged by the mill at the mill prices and establish the prices to their customers so