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CHAPTER VI

THE ECONOMIC FACTORS DETERMINING EXPORT

PRICE POLICY

In this chapter an effort will be made to explain the reasons for the diverse price policies disclosed in chapter V. To be sufficiently comprehensive, this explanation must embrace the reasons of management for its price behavior and also the economic or objective factors which limit management in its choice of price policy. Explaining price behavior is a precarious task, so that the discussion to follow must be considered tentative and exploratory rather than definitive.

EXPORT PRICES HIGHER THAN DOMESTIC PRICES

When an individual or a group of individuals organize a business enterprise there is a presumption that all efforts will be directed to making profits as large as possible within the limitations of legal restrictions and current business mores. It is to be expected that any firm will try to get that price for its product which will yield the greatest net return on its total operations. The impediments to a relatively high price are due, in general, to the prices of competing or substitute products, and/or the reduced volume of sales that results as the price is increased, and/or the variation in costs per unit of product as the output is reduced. If, in view of these conditions, a higher price will result in larger profits, there is a presumption that any firm will charge the higher price. No particular rationalization, therefore, is required to explain the willingness of the firms in group to charge higher prices on export shipments than in the domestic market. With their knowledge of demand and cost conditions, they presumably are convinced that the higher export prices make their business more profitable than a price equal to, or lower than, the domestic price. What does require explanation, however, is how they are able to get the higher price. What peculiar circumstances give these firms the power to exact a higher export price and what prevents an equally high price in the domestic market?

I

With regard to the cases of type I the answer to this question is quite simple. The products in both these cases are derived from a raw material of which the major economically available supply is in the United States. Export prices in these cases are admittedly monopoly prices. This export monopoly rests upon two factors: (1) The United States producers collectively control a dominant share of world output and (2) they are effectively organized to control export prices in these cases legally under the provisions of the WebbPomerene Act. Both of these factors are necessary for the maintenance of the higher export price. There must be control of output over the relevant price range. It is obvious that the supply abroad

must be relatively inelastic; that is, foreign production must not increase much when the price goes up, or the American producers will lose their foreign markets as they raise the price. And while the control of supply would be ineffective without the organization to exercise that control, the organization in itself cannot create that control. In all there are six Webb-Pomerene export corporations in our sample and only two fall in group I. Two of the others are in group II and two in group III.

As the producers in these industries do not have the legal right to organize and fix prices in the domestic market the presumption is that the lower prices in the domestic market are due to the degree of competition. While this does not mean that competition is absolutely unfettered among the producers in the domestic market the latter obviously does not have the same legal freedom to fix monopolistic prices as in export markets. Possibly there is no agreement as to prices in the domestic market; possibly the producers are deterred from fixing a higher domestic price because an antitrust action might be instituted; or possibly the deterrent is the likelihood that large domestic consumers would force their way into the industry. One can hardly expect to get an adequate and precise answer to this question from the industry itself.

It is interesting to inquire how it is that the foreign customer cannot buy at the domestic price simply by concealing his identity or by using a third party in the United States as an agent. In example 1, where the differential between export and domestic price was 20 percent, there would seem to be a pecuniary inducement large enough to lead to "bootlegging" of the product out of the United States. The management in this case states that the problem has never arisen but that foreign customers could not buy at domestic prices for two reasons. (1) The producers are well acquainted with the trade and know who in the domestic market is buying for his own use. If an order came in from an unknown person and the destination of the shipment was uncertain, they simply would not sell to him at the domestic price. (2) On the other hand, the customers who are buying at the domestic price would have little margin to cut the export price after paying freight costs and repacking for export shipment. Unless they directed shipment to the nearest port of export they could hardly sell under the export price of the company, and they could not request delivery at the nearest port of export without revealing their intention to the company.

While the cases in type 2 do not have the monopoly element in export markets that the cases of type 1 have, the basic explanation for the higher export prices is still that these firms are faced with a higher degree of competition in the domestic market than in their export markets. The products in all three cases of type 2 are more or less standardized commodities sold to industrial consumers for whom a brand name is of little significant. Prices for export are quoted c. i. f. and either there are no f. o. b. prices known to the export customer or he is unable to arrange for shipment himself.

Consider the facts given in example 3. The company sells in export at c. i. f. prices for which mill nets vary as much as 16 percent, and its mill net on export sales is never less than its net realization on domestic sales. Why is this rather wide variation in export prices possible?

The customer, of course, is interested in getting the product at a landed cost which will enable him to use it profitably or more profitably than using some other material. His landed cost is equal to the c. i. f. price plus the import duty. A very high duty will make sales impossible, and it is only in countries that have no local industry producing a similar product and where the duty is for revenue purposes that the company can get any business. A relatively low rate of duty or a favorable ocean freight rate or both will usually allow the company to get a higher f. o. b. price. Or it may be that these costs are merely lower than similar costs for a substitute product. Factors such as these determine local market conditions. The company is able to vary its price for export in accordance with local market conditions because the various local markets are independent of each other.

What if local market conditions demand a lower f. o. b. price than the average domestic net (f. o. b.) price? The answer is merely that the company, as a matter of policy, is not interested in export business at such prices and will not consummate sales that yield less than its domestic net price. The company has not been burdened with any serious excess capacity, it has not been forced to seek new markets for its output, and it has, in fact, been drawn into the export business only because it could get more attractive prices. In other words, the company has a favorable business position in the domestic market which permits considerable latitude with regard to export price policy. But the rationale of export price policy from the standpoint of the company does not explain the economic conditions which allow the company to maintain that policy. Why is it, then, that the company can get a higher price abroad than it can at home?

The answer is that there is less competition from other mills in the industry for export business than for domestic business. Most of the mills in the industry make no attempt to get export sales, but they do compete on a price basis for domestic business. There are several reasons for this condition. In the first place, while it is easy to canvass the domestic consuming trade by telephone or in person it is not so easy to make contacts with the foreign consumers. It could be done, but it is expensive and the volume of business that a mill just entering export could get would hardly pay for the effort and expense of getting it. Then, too, the industry knows that the possible volume of export business is not great enough to warrant the attention of many mills, so there is not much incentive to go after export business. Another factor of importance is that many mills are not located on tidewater, hence not so favorably situated to export their product. They could not accept export business unless the price covered inland freight, and for those located far enough inland this would erase the price differential. It must also be remembered that the export prices of the exporting company are very much a business secret. The foreign buyer, on the other hand, would probably be faced with difficulties in getting another supplier even if he knows that he might be able to get a lower price. He does business with the foreign agent on the spot and no other agents compete for his trade. He cannot without expense contact other firms and as he knows their United States delivered prices, which are either identical with or comparatively close to the domestic prices of the firm with which he is already dealing, he probably sees little incentive to do so.

For these reasons competitive forces have failed to break

through the established lines of trade and bring export prices down to domestic prices. The company that was in the export market first remains in an advantageous position. Quite possibly this condition is not a permanent one, but the result only of what are usually called frictional impediments to the operation of the competitive process. At the present time, however, the export business is a series of isolated transactions in which the buyer and seller agree on a price. The buyer apparently has only limited knowledge of the American market and the seller has only limited competition. Prices are not made in a fairly well informed market consisting of a number of buyers and sellers, as is more or less the case in the United States.

The explanation of higher export prices in the other two cases of type 2 is quite similar; more firms are competing in the domestic market than in the export market. Coupled with this is the fact that the exporting firms are in a position to maintain their price policy; that is, they can refuse export business that does not yield a higher net return than domestic sales.

The economic or technological factors that restrict the export business to fewer firms than compete in the domestic market differ from industry to industry. In one of these cases the risk factor which has arisen in the past decade of exchange restrictions is an important deterrent while in the other case the complicated character of exporting techniques and the elaborate organization required to handle exports prevents the smaller firms from competing for this business.

The greater degree of competition in the domestic market is also the explanation of higher export prices in the type 3 cases. Because fewer firms are competing for the export market it has been possible to maintain higher list prices and proportionately lower selling costs. The products in these cases are branded consumers' goods and all the brands have definite consumer appeal. The company is able to exact a slightly higher price from the foreign distributor, because no one else can supply him with that particular branded line of products. The company appoints him the distributor and his business thereby becomes tied up with a particular brand. The distributor is hardly in a position to do anything but accept the price quoted him by the company.

Why are not more domestic producers competing in export markets? Many companies can produce and sell for the package trade of the domestic market but to do an effective job in export is a more difficult matter. The mere problem of getting an export organization abroad is a formidable one. The small size of many foreign markets, the limited number of dealers available in contrast to the domestic market, and the established reputation of certain trade names all limit the number of firms that actually do an extensive export business. For these reasons the position of a company that is established in export markets is more secure than its position in the domestic market. This fact suggests why advertising and selling costs are a much higher proportion of domestic sales than of export sales. But whatever the reasons, it is clear that competition by domestic producers in these industries is a more effective regulator of price in the United States than in many foreign markets. Another important factor from the company's standpoint is that in the domestic market there are models priced for almost every type of buyer. The relation between purchasing power and price is such that this product has

achieved mass distribution. This is hardly possible in most foreign markets to which the company exports. Total landed costs make the retail price much higher than in the United States and low purchasing power makes the product somewhat of a luxury item. Such a condition militates against price reductions.

At the same time the difference between domestic and export list prices for identical models must be kept rather narrow or this business would soon fall into the hands of the domestic distributors. While they are not at present equipped to handle exports they would soon establish the necessary marketing organizations if the price differentials were wide enough to make it attractive.

It is of great importance to note that the differing intensity of price competition in the domestic and export markets is not only a matter of the number of manufacurers selling in those markets. The variety of distribution channels in the domestic market and competition among the various types of retail outlets puts considerable pressure on the manufacturer to offer his product at a price that can meet the competition. The initiative taken by certain mass-distribution organizations in procuring lower-priced products in the industries under consideration are well-known examples of the competitive business created in this way.

The same thing is observable within the single manufacturing organization described in example 30. The new channels of distribution that have grown up and captured a large share of the domestic business have forced this company to manufacture for those price markets. On its chain-store line, 5- and 10-cent line, or private brands, prices are decidedly lower than export prices. It is true that only the branded line is sold in export, but the brand is of no great significance as it is not advertised abroad. There is no telling what the company's export policy would be if it had the same kind of price competition from 5- and 10-cent stores and chain stores abroad as it has here.

Another consideration that may lead to a higher export price, while not clearly exhibited in any of the group I cases, is illustrated in examples 26 and 27 of group III. We have in those examples companies that sell a large share of their export shipments at lower than domestic prices, but for some products get a higher price on export sales. The reason for the higher export prices is that the products are designed for a particular price class in the domestic market. The products in the examples are $0.25, $1, and $1.50 "sellers" at retail throughout the United States. But while these price classes have meaning for the domestic market they have no particular meaning in foreign markets when converted into a price in local currency. The export price can, therefore, be adjusted to fit local market conditions and in these cases local market conditions make a higher price more profitable for the company. There are other cases, discussed later in the chapter, in which local market conditions or a foreign price class make a lower export price necessary.

WHAT VOLUME OF EXPORT TRADE IS SOLD AT HIGHER THAN DOMESTIC PRICES?

After reviewing the cases with higher export prices and the probable explanation of the price differences a question naturally arises as to the quantitative importance of these cases in our export trade.

257769-40-No. 6--6

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