International Price Discrimination and its Benefits
International Price Discrimination Explained:
Price discrimination occurs when producer charge different prices for that same product in order maximize their profits and when these discrimination takes place while dealing with the product globally, outside the national territory then it will have called International Price Discriminations, it isn’t possible the Price Discrimination in a perfectly competitive market, it has to be any other market except for perfect markets like monopoly or oligopoly. The company uses this tactic to generate more revenue as much as possible.
Listed are some of the factors that attract producers to use international price discrimination settings.
Factors Attracting Producers to Create International Price Discrimination:
- Exchange Rate: Exchange rate plays a vital role when a firm enters an international market, the higher the exchange rate the higher chance a company gets to charge higher prices in the international market, for example: if a firm charges Rs. 1500 in Pakistan for a product and they export the same product to the United State which has an exchange rate of assuming Rs. 150 to $1. So the price for the same product would be just $10, which is way too cheap for the citizens of the US, that’s where the firm got the opportunity to charge a much higher price say $50-$100 for that product. This how the exchange rate attracts international price discrimination.
- Geographical Factors: Developed countries have the more potential to pay more than any other Under Developed and Undeveloped countries because individuals there has more purchasing power and high level of Income, so when companies from undeveloped countries or even underdeveloped countries get the opportunity to export goods and services to Developed countries then they can charge extra prices for their products because if they won’t charge the price as per the level of those developed countries then people might not buy the product considering the quality would be low because of low pricing.
- Bulk Quantity: When a firm gets a Huge International Order, even from an underdeveloped country, the company gets the opportunity to use the price discrimination tactic in order to provide a low price so that they don’t lose the order, even though the profit margin would be low in this order but this will increase the overall revenue of the firm which in turns increase the firm’s total profit which is the main goal of any firm to maximize total profit. This attracts the firm to use price discrimination.
- Special Discounts: Firm can provide special discount benefits based on different criteria’s in order to increase their sales, for example, Ali Express provides special coupon of $5 on the purchase of more than $500, further they also provide promo discounts for different in order to make the price suitable for them to buy the product. This is the perfect strategy to price discrimination in order the maximize the revenue and increase the overall profit of the firm.
Benefit from International Price Discrimination:
Yes! Companies get so many benefits from international price discrimination, it helps them accumulate more profit than they usually earn, which means they can maximize their revenue much more than they actually earned. Price discrimination is a simple concept that suggests charging different pricing from everyone based on an assumption for the same goods. It can be either high price or low price, that doesn’t matter, the main would be to increase the maximum profit. Some of the benefits are as follow:
- Economies of Scale: The one and the most important benefit that a firm gets with price discrimination is that they can enter in different markets globally with their pricing levels, from this their demand would increase tremendously and their firm can achieve the economies of scale by massively increasing their level of production, this economy will help the firm to lower down their average cost per product which enable them to set lower prices in the foreign markets and increase the demand of their product and thus eventually increasing the overall profit of the firm.
- Maximize Revenue: International Price discrimination can help a firm to raise their revenue phenomenally, when a firm use the price discrimination, they can target more customer with low-income level, they can charge high prices from the countries and states that can afford the high pricing and similar charge the low-level income state in this way which will increase their revenue and the difference in the profit can be cover through the profit from high pricing states, overall in result firm will get the higher revenue because of targeting more customers.
- Gather more Customers: Offering different sorts of discounts to the customers on their purchases by some given scenarios, for say: $100 discount on the purchase of more than a given amount or providing free home delivery based on a purchase of more than a specified amount. These little discounts of international price discrimination play a vital role in attracting more customer which in turns maximize the firm’s value.
- Raise Market Share: If the firm uses international price discrimination effectively, it could gain a major market share in the lower-income countries with lower GDP and economic worth. They just have to make enough sales in some high-level income countries with higher GDP and economic growth (say the UK), from their firm, can maintain a high-profit share with higher prices and that can be used in providing the same goods and services on a much lower price in the lower-income country (say India), most of the required profit would already be gained from the UK, so a lower profit margin in countries like India wouldn’t affect the firm instead their revenue and profit will rise.