# A short (?) discussion on international pricing...



## b-y (Sep 14, 2004)

_This is continued from a separate thread:_


> Quote:
> ...
> 
> Now, to the pricing questions: International pricing disparities are the norm--just look at all the debate over the pricing of pharmaceuticals in the US vs. the rest of the world. The pricing differences may, but do not always, indicate dumping. If you want a detailed explanation of the underlying economics, let me know and we can start another thread.
> ...


It is a bit more complicated. The basic concept at work here is sometimes known as *Ramsey pricing *(1927). (See the discussion, with historical notes and calculus at Wikipedia: http://en.wikipedia.org/wiki/Ramsey_pricing , although they have one aspect wrong. You do NOT need a monopoly, just product differentiation and multiple markets as in luxury automobiles or pharmaceutucals.) The profit-maximizing (and welfare-maximizing--see note at *) strategies are to (1) Have all prices above incremental costs and (2) Have the markups inversely proportional to the elasticities of demand in each market segment. So, using mid-sized luxury sedans as an example, the market price will be lower in countries (such as the US) where that market segment is more competitive (say from Asian imports). Often there are other factors at work such as taxes, etc., but the underlying economics is still valid. (The incremental price test *may* help the firm avoid charges of "dumping".)

*Note: While the relative relationship between prices holds for both profit-maximization and welfare maximization, the *levels* may be very different.


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## JSpira (Oct 21, 2002)

Before you go too far on this, I think all we need to do is examine the Big Mac index. :angel:


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## beewang (Dec 18, 2001)

JSpira said:


> Before you go too far on this, ....


Sorry... too late!!!

The concept of "DUMPING" doesn't really exist in the real world. The pricing disparity between 2 markets, all else equal (Ceteris paribus), is a function of market segmentation. So yes... we are both saying the same thing, its just that you are going about the wrong way


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## mondo21 (Dec 26, 2007)

Okay. Charge what the market will bear (elasticity of demand) unless that price is below the cost to make the next unit (incremental cost). Gotcha.


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## zoltrix (Mar 14, 2007)

b-y said:


> _This is continued from a separate thread:_
> 
> It is a bit more complicated. The basic concept at work here is sometimes known as *Ramsey pricing *(1927). (See the discussion, with historical notes and calculus at Wikipedia: http://en.wikipedia.org/wiki/Ramsey_pricing , although they have one aspect wrong. You do NOT need a monopoly,...


Ehh...

Edit the wikipedia, please!

To reflect the CORRECT definition.


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## zoltrix (Mar 14, 2007)

So, what this Ramsey dude figured out is that you should charge whatever people are willing to pay and no more.

And if BMW were to charge $100k for a 3er, people would flock to Lexus instead. And the two can't collude because it wouldn't be an evolutionary stable strategy.

Got it.

All this is revolutionary and worthy of an eponymous problem how, exactly? Seems like common sense.


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## mondo21 (Dec 26, 2007)

coontie said:


> So, what this Ramsey dude figured out is that you should charge whatever people are willing to pay and no more.
> 
> And if BMW were to charge $100k for a 3er, people would flock to Lexus instead. And the two can't collude because it wouldn't be an evolutionary stable strategy.
> 
> ...


It's common sense now, it may not have been common sense when it was originally proposed (I'm not sure when that was BTW).

It's also common sense that bacteria and viruses cause infections and not evil spirits. You would've had a hard time proving that in the 19th and early 20th centuries.


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## chrischeung (Sep 1, 2002)

So if I quote Ramsey, will I get a lower or higher price from the dealer?


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## zoltrix (Mar 14, 2007)

mondo21 said:


> It's common sense now, it may not have been common sense when it was originally proposed (I'm not sure when that was BTW).


According to wikipedia -- 1933.

Still, you're saying that before 1933 merchants had absolutely NO idea how much to charge for their products?? C'mon.

I think for as long as commerce existed, even going back to barter, people understood that if you're to sell anything at all, you can't charge more than what the people are willing to pay. Hell, even monkeys trade trinkets and grapes for sex and know exactly how much to charge for what.

What I think I didn't get before and I went back to wikipedia to re-read that article, is that the Ramsey problem doesn't say, "Don't charge more than what the people will pay" -- an obvious thing, clearly but instead it says, "If you wanna sell your crap, at maximum profit, THIS is how much you set your price at."

That's where the Lagrange multipliers come in. It's a classic solution to all sorts of optimization problems.

So, the solution to the equation, for a BMW 3 series auto, is to set the base price at $34k, or there abouts.

They key (and presumably the challenge) is figuring out how loyal people are to the BMW brand.


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## zoltrix (Mar 14, 2007)

I must say, b-y, this is the first time I've seen a clear explanation for the pricing disparities between Europe & US.

Thank you!


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## beewang (Dec 18, 2001)

coontie said:


> I must say, b-y, this is the first time I've seen a clear explanation for the pricing disparities between Europe & US.
> 
> Thank you!


Fell asleep in your Econ 310 class in college aye!!??


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## aaleaman (Apr 1, 2008)

This thread is making me wonder if anyone else here is taking the CFA in a few weeks...


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## GOFASTR (Apr 13, 2007)

Just makes me nostalgic for the good old days of pharmacy school.... That was a piece of cake compared to all this!


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## DXK (Jun 1, 2007)

Pharmaceuticals are less expensive in Europe / Canada because the government controls the pricing. Another words, since the healthcare is government controlled, the government is a buyer of drugs and therefore sets the prices. Most of the profit that pharma companies make is made in the U.S. where they can charge anything. Once government takes over here as well, the prices and profits would fall, but so is the incentives to develop new drugs, especially ones for rare deceases where demand is small. 
Prices for other goods are higher in Europe because traditionally, European market have been broken down to small markets (countries) whereas U.S. was one giant market with high income consumers. As EU continues to intergrades and truly becomes a single market, and the incomes would raise, as they are doing now, the American market just as America in general should become less important – the world will become multi-polar and not dominated by a single country. The dollar then will stop being the dominant currency. There will be EU, India / China, maybe others, so the pricing should become more equal.


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## zoltrix (Mar 14, 2007)

beewang said:


> Fell asleep in your Econ 310 class in college aye!!??


Fell asleep?

I wasn't there that often!

No, really. Econ never made much sense to me, to be honest. All I remember from the only Econ class I ever took are the graphs.

LOTS of graphs that somehow were supposed to illustrate something.

I showed up once, sat in a room with 600 of my closest friends and never came again.

I mean.. some things are just NOT meant to be understood by me, that's all. I took a diff eq class THREE TIMES. Once in high school, twice in college. ALL 3 times the exact same book was used. Got an F twice and a B the third time. I mean, kill me, I just didn't get that ****. :dunno:


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## zoltrix (Mar 14, 2007)

DXK said:


> Pharmaceuticals are less expensive in Europe / Canada because the government controls the pricing. Another words, since the healthcare is government controlled, the government is a buyer of drugs and therefore sets the prices. Most of the profit that pharma companies make is made in the U.S. where they can charge anything. Once government takes over here as well,


Mwahahahaha..

Oy. Forgive me, while I wipe the tears off my eyes and snot off my keyboard.

Government takes over? In the UNITED states of America?

Yea.

Suuuuuuuuuure.

You'd have to line up 70% of Congressmen and shoot them first for treasonous bribery.

This little feller:

http://en.wikipedia.org/wiki/Billy_Tauzin

becomes a pharma lobbyist *the day he quits Congress* and is only one of the most egregious examples (and the prime reason why our government can't negotiate bulk prices for Medicare drugs)

and then there's this little gem:

http://en.wikipedia.org/wiki/Medicare_Prescription_Drug,_Improvement,_and_Modernization_Act

which our friend above helped to write (and by write I mean copy & paste PhRMA's instructions).

Yay for our beloved Congress and the corrupt hyenas therein!


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## b-y (Sep 14, 2004)

coontie said:


> I must say, b-y, this is the first time I've seen a clear explanation for the pricing disparities between Europe & US.
> 
> Thank you!


Thanks for the feedback. Despite some of the nasty comments from _some_ people (_you know who you are_), I actually enjoy discussing this stuff. :angel:



> Ehh...
> 
> Edit the wikipedia, please!
> 
> To reflect the CORRECT definition.


Perfect monopolies are rare and mostly the result of governmental restrictions rather than the underlying economics. But some firms come close (DeBeers was the classic example and prohibited from doing business in the US). The Wikipedia definition has an odd mix of very precise mathematics and some sloppy wording.


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## beewang (Dec 18, 2001)

b-y said:


> ... Despite some of the nasty comments from _some_ people (_you know who you are_), I actually ..
> .


Who dah B ??!!:eeps: 



b-y said:


> ... ..Perfect monopolies are rare .... blah blah blah.... But some firms come close (DeBeers was the classic example and ,....


Okay tough guy... here goes... DeBeer is actually a *"Cartel"* to which collectively, (thru collusion) excercises its monopolistic power by limiting it output and thereby capture the higher profit 9as shown below in the green-ish XXXX section












b-y said:


> ... ..Perfect monopolies are rare .... blah blah blah.... The Wikipedia definition has an odd mix of very precise mathematics and some sloppy wording.


LOL!! Those "math" are referer as "Marginal Analysis" :rofl:


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## b-y (Sep 14, 2004)

beewang said:


> Who dah B ??!!:eeps:
> 
> Okay tough guy...  here goes... DeBeer is actually a *"Cartel"* to which collectively, (thru collusion) excercises its monopolistic power by limiting it output and thereby capture the higher profit 9as shown below in the green-ish XXXX section
> ... :rofl:


Very good, as far as it goes. They were actually much more sophisticated. Your analysis is for the pricing of a single gem. They often engaged in a bundling strategy combined with a take-it-or-leave-it offer: "Just for you we have this old rusty coffee can full of gems, some we know you want, some you probably don't. The price for the entire can is $xxx. Feel free to take it or leave it, but--remember--if you pass up these offers too frequently, we won't invite you back."

The Ramsey strategy doesn't rely on such threats. "We know our [telephone service/ antibiotic/ luxury vehicle] is highly desirable to certain market segments and that subsitutes are viewed as inferior in some way. Therefore, we will charge this mix of prices across products and markets to maximize profit."

The DeBeers approach is generally not legal in the US; the Ramsey one is (and may even be required or promoted by regulators).

Now...back to the important work of trip planning!


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## dalekressin (Sep 3, 2008)

I revive this very old thread because it really made me laugh this morning.


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