Three Pricing Policies for a Multi-Product Multi-National Company

Abstract

A price leader must formulate list prices every time he introduces a new product line (fairly frequently in a technologically developing industry). This is not easy. When the company is multi-national, pricing policy becomes further complicated by the issues of centralization versus autonomy of the national subsidiaries, and three pricing schemes are encountered in practice. Scheme 1. The price of an item is the same around the world, except that the customers absorb freight plus import duty. Very simple price coordination and auditing results from this policy. Scheme 2. National prices for the line equal an optimally determined national weighting factor multiplied by a set of benchmark prices. Scheme 3. The subsidiaries can take advantage of local competitive climates with no fixed requirement that prices be coordinated across the nations. For each pricing scheme the overall profit equals the model profit minus administrative costs. The three schemes are sequenced in order of their model profits, which is also their likely administrative cost sequence. We shall compute their comparative model profitabilities so as to have bonds against which to gauge administrative costs. A base case is presupposed. Adjustments to prices and to marketing budgets induce changes in the quantity sold, and hence in the production cost. The profit function is approximated as quadratic in the control variables of price and marketing budget, so that optimal adjustments can be calculated by little more than inverting a partitioned matrix.