With 10 cases out of the sample of 76 in this category there is an indication that a not insignificant proportion of our export business in manufactured goods is done at higher than domestic prices. What then, is the probable proportion of exports priced higher than similar goods in the domestic market? Is the proportion indicated in the sample an exaggeration?

It is, of course, impossible to answer these questions with any statistical validity on the basis of the present study. This is essentially a case study, which cannot provide quantitative results. However, the 10 cases of group I are not merely freaks of the business world, and it is very improbable that they exaggerate the quantitative importance of higher export prices. One should note also that many of the cases in group III are firms that sell some of their exports at higher prices, and many other companies have lower selling costs on their export sales. The summary table at the beginning of this chapter shows that 18 cases in the sample find export business more profitable than domestic and that 4 others in group III find exports as profitable as domestic sales. For these reasons it is probable that the ratio of 10 to 76 is not an overstatement of the area of higher export prices; quite possibly it is an understatement of the actual volume of export sales made at higher prices for the industries represented in the survey. The writer has the decided impression, after contact with many individuals in the export business, that higher export prices are not limited to a few isolated instances; they are of quantitative importance in the total volume of our export trade in manufactured goods.

EXPORT PRICES EQUAL TO DOMESTIC PRICES

There seems to be a widespread belief that the normative procedure of a producer in a competitive industry is to sell to all customers at the same price and that there is, therefore, no reason why export prices should be any different from domestic prices. The rationale for this belief derives from the observable facts of the organized impersonal markets in which standardized commodities are bought and sold. In such markets, of course, the seller cannot differentiate among customers because the transactions are arranged by a third party and there is no personal contact between buyer and seller. Thus, there cannot be any separation of domestic and foreign buyers because the seller cannot control the destination of shipment.

Leaving aside till later in the chapter the difficult question as to when an industry is competitive, it should be observed here that where goods are not bought and sold exclusively on an organized market, or what amounts to an organized market, there is no reason why, from the mechanics of distribution itself, shipments to all destinations must be made at the same net price. There is a personal contract between the seller and the buyer so that the seller can quote a special price for a particular buyer and can control the destination of the shipment. This is substantially true for most products manufactured by the firms reviewed in this survey. The management in all these cases could adopt export prices that differed from their domestic prices if they considered it desirable to do so. In a sense, therefore, all the companies in group II whose export and domestic prices are the same have adopted a conscious price policy just as

much as the companies that have different domestic and export prices. From the objective standpoint domestic and export prices can be unequal just as well as equal. Hence, there must be reasons for the price policy in either case. The one type of policy is no more normative than the other for all goods not traded in organized markets or their equivalent-well-informed groups of buyers or sellers with about the same bargaining strength.

It was with this point in view that the firms in group II were asked why they adhered to a policy of identical domestic and export prices. The following list represents the investigator's interpretation of the reasons given for equal domestic and export prices in these cases.

1. In a few cases involving standardized commodities the management believes that any other than domestic prices that could actually be obtained in export would be less profitable. Higher export prices are impossible because foreign buyers know the domestic market well and can always find firms willing to sell at the domestic market price. Lower export prices would be unprofitable because the trading profit margin is small, and unnecessary because a price concession in the domestic market for the purpose of disposing of merchandise is just as effective as in export markets.

2. Foreign buyers often come to the United States on buying trips and visit the salesrooms of the company, so higher export prices would cause a great deal of trouble. Again, the company does not have to sell at lower prices-it could do that in the United States. Several other firms also said they were not interested in exports if they could not get their price.

3. The management in a few cases stated that the domestic price was too well known to be altered for export customers.

4. Price concessions were experimented with in 1931 and 1932 when many foreign dealers were hard hit by exchange depreciations. The company states that it had so much trouble with those concessions that it does not intend to give any again.

5. One company states that its products must sell on their efficiency. Price is a relatively minor matter if they have the best equipment for the job. Failing this, no price concession that the company could afford to give would help make the sale. The company has never tried to get a higher price in export because it is satisfied to get the domestic price.

6. In few cases it is obvious that the management has never drawn a distinction, even in its own mind, between domestic and export customers. A one-price system is followed as a matter of policy. Different prices to different types of customers have been contemplated but never on the basis of domestic or export shipment. That distinction has no meaning for the business of these firms.

7. Most of the firms maintain equal prices to all customers as a matter of policy because that policy conforms to their conception of ethical business practice. They seem to feel that it would be unfair to their domestic customers to sell abroad at lower prices and unfair to their foreign customers to ask them a higher price. They think that sound business must be built upon fair dealing and that is interpreted to mean an identical price for all customers.

8. A reason for equal domestic and export prices given by some of the group III cases should be mentioned here. The firms are willing and often do adjust prices to fit conditions in the given export market,

but if they have no special knowledge of local market conditions they simply quote domestic prices and take whatever business comes. It seems to the investigator that this is also the real reason why domestic and export prices are equal in some of the group II cases. Firms selling the large bulk of their output in the domestic market establish their price schedules to fit domestic market conditions. Export sales are a byproduct to domestic operations. The firms are not making an intensive effort to get export business, and they frequently do not have an intimate knowledge of market conditions in foreign countries. In many cases, being in the export business only means that the firms have established some sales contacts abroad. They do not know enough about conditions abroad to price specifically for local market. Such is often the policy of companies that export a small proportion of their output.

The 8 reasons given above for identical domestic and export prices also apply to that part of export sales of the group III cases for which prices are the same as domestic prices. It should be evident that the volume of exports at prices equal to domestic prices is much greater than could be inferred from the fact that only 21 cases out of 76 were in group II. In many of the group I and group III cases a large part of export sales are at domestic prices. It is probable that the volume of exports for which prices are equal to domestic prices is larger than the volume sold at lower prices.

EXPORT PRICES LOWER THAN DOMESTIC PRICES

The following discussion is devoted to explaining why prices for export in many cases are lower than domestic prices. There are various aspects of this problem.

1. Why the management of a firm is willing to make price concessions on export sales.

2. The factors in foreign market conditions that necessitate price concessions.

3. Why higher domestic than export prices are possible.

a. The monopoly aspects of the problem.

b. The influence of tariff protection.

c. The difference between the selling problem in the domestic market and that in foreign markets.

d. The influence of disequilibrium conditions.

4. Other factors influencing export-price policy.

While these factors will be discussed separately, a complete explanation involves all of them.

1. Why Is a Firm Willing To Grant Price Concessions on Export Shipments?

In any analysis of the price mechanism it must be assumed that in business operations undertaken for a profit the aim of management is always to make profits as large as possible with the economic resources at its command. The problem in every business is to find the volume-price relationship which will yield the greatest net return above the costs of producing that volume of output. Where the producer has no option but to sell at the market price and any possible output that he might produce is too small to have a significant in

fluence on the market price then the relation between costs and the volume of his production offers the only control he has over the profitability of his operations. But where the producer can get some sales at a series of prices or where he knows that the volume of his production has a significant influence on the price then he has also the price variable to consider in finding his most profitable scale of operations.

The point is that for any given volume of output a producer wants to get as high a price as possible since that will maximize his profitwith the proviso, of course, that he will not exploit a temporary situation to the full if such conduct is likely to result in less profitable operations in the future. A firm is willing to grant a price concession in a particular market, therefore, only because it has no alternative market in which it could obtain a higher price for that part of its output in addition to its existing receipts from each market and because its total operations would be less profitable if it were to forego that business at lower prices. Once again it is the profitability of the business in the long run that is the dominant consideration.

Among the 46 cases of group III in this study the following reasons were given as to why the lower export prices currently in effect increase the profitability of operations. It is not feasible in outlining these reasons to indicate the number of cases which mentioned each one because the answers to any inquiry of this type vary considerably with the articulateness of the executive interviewed rather than with the actual considerations behind the price policy. As the investigator was making every effort to allow the executive to make his own case and not to interject suggestions which might merely provide a rationalization for the price policy, only meager responses were obtained in several cases on this problem. However, each of the following reasons were given in at least 2 of the 46 cases. The exports referred to below are only those which are sold at lower prices:

(a) Many of the cases stated that any attempt to sell the lowerpriced exports in the domestic market would be possible only at less profitable prices for the entire output. Even though the domestic market might absorb the exports at the lower export price or perhaps at a smaller price reduction than is now given in export, the consequence of reducing the price on the existing large volume of domestic sales would lower gross receipt from sales on total output and hence make the business less profitable. In other words, it would not pay to break the domestic price.

(b) Quite a few of the cases believe that the domestic market is absorbing as much of the products as is practically possible and that no feasible reductions in the domestic price would appreciably increase the volume sold. It is their belief that the domestic demand is highly inelastic and consequently there is no further outlet in the domestic market.

(c) In many cases it was stated that while some export sales would be possible at the domestic price, the lower export price results in so large an increase in sales that total profit on exports is enhanced.

(d) Others consider foreign market conditions such that no sales (in that particular market or in all markets as the case might be) are possible at domestic prices. By giving a price concession they get some sales and while the margin of profit is less than on domestic sales the exports are still profitable.

(e) In some cases the export price does not cover full costs but it does cover factory costs and part of the overhead and thus reduces the burden on domestic sales.

(f) In other cases it was stated that the increased volume obtained by the export-price reduction lowers the average manufacturing costs. The exports are, therefore, profitable even if prices only cover outof-pocket costs involved in the transaction as the profitability of domestic sales is thereby enhanced. It should be noted that this is not a universal proposition as some firms find that filling export orders often increases manufacturing costs. These are cases with diversified lines of products all of which are not manufactured simultaneously. When export orders do not fit in with the domestic production schedule the cost of both export and domestic manufacture is increased.

(g) Some stated that the volume that could be absorbed by the domestic market would not provide reasonably full employment for their labor and that without exports labor turnover would be much larger. As the cost of training new hands is very high (over $150 in one case) it pays to continue exporting even though exports show a book loss.

(h) Several of the firms stated that they sell a few items in their lines at a lower profit, or at a loss, because it enables them to sell other items on which they get the full domestic price or more. These are cases in which the foreign distributor requires a full line in order to stay in business or to increase his sales to a more profitable level for the American producer.

(i) It was quite frequently claimed that the price reductions were made for the purpose of tiding over a temporary situation due to depressed business conditions in a particular country or to a depreciation of the exchange. The company did not want to withdraw from the market as it had an investment tied up in it in development costs. It was felt that a return on that investment would again be possible and profitable business in that market would come back if only the dealers could be maintained in business and the product kept before the public in the interim. It should be apparent that these factors are not independent but are interrelated in determining a firm's price policy.

2. Factors in Foreign Market Conditions Which Necessitate Lower Export Prices.

The discussion above may be summarized merely by saying that a firm exporting at lower than domestic prices does so because its total operations are more profitable with those export sales than without them. Once this point is recognized it is pertinent to ask why it is that export prices equal to domestic prices cannot be obtained in some or all export markets. What conditions are there in the foreignmarket situation different from the domestic which make lower export prices necessary? These are the conditions, one might say, which the management is attempting to overcome by a price concession. The following factors were all mentioned by the 46 cases of the sample which are currently exporting at lower than domestic prices.

(a) The existence of foreign competition of similar goods priced lower than American products is the factor most often cited as