While globalization has presented opportunities to corporations
seeking to expand their markets, it has also brought problems. In
particular, globalization is helping to develop consumer awareness of
price variations between regions. The result is not always beneficial
to the corporations. Nevertheless, corporations are quite resourceful
in their attempts to preserve their profits. This essay explains explains
the geographical arbitrage problem that corporations face and some of
the techniques they use to try to eliminate arbitrage opportunities.
The optimal price is chosen using basic principals of micro-economics. Higher prices will reduce the number of customers and a lower price will increase it. The optimal price is the balance point where any price change reduces profit. Stated in pure economic terms, it is where the supply and demand curves meet. This is the law of supply and demand. An abundance of product depresses its price, a scarcity raises it. Likewise, when demand increases, the price increases. An oversupply causes prices to fall.
Less obvious is that an abundance of wealth (e.g. money) in the hands
of consumers also cause prices to increase. Similary less wealth leads
to lower prices. Here we are simply viewing the supply and demand mechanism
through the lens of money rather than that of the product.
The same rules apply, but the roles are reversed.
You can view the transactions as if the
product was being used to purchase money.
Most sellers, e.g. companies, will try to explain that different labor costs or shipping costs justify different prices. This is partially correct. Different labor and shipping costs, lead to different product costs.
An economist, on the other hand, will answer that the company is merely acting according to the first rule of marketing. The company is setting it's price, on based what the customers in each region are willing to pay. The different prices are caused by the company's attempt to maximize it profits in regions where the customers have different amounts of money.
Thus, if customers in a particular country have more (or less) money, prices
will vary accordingly. Prices in a particular country roughly correlate to
its wealth.
This is hardly surprising. Things costs more in rich countries than in
poor ones. Now we know why.
What occurs when you buy cheaper somewhere else? You reduce the demand in the
expensive region and increase demand in the cheaper one. In theory, you could
make business of buying in the cheaper region and selling in the expensive
one. Indeed, many companies do. However, this practice, called
arbitrage, alters the demand in both regions and leads to a
leveling out of prices, until the arbitrage profit is no longer assured
(2).
Public relations: Communications activites by companies that attempt to convince the consumer not to transfer products between regions. Often companies exploit a lack of knowledge about the different regions in order to generate fear and uncertainty in the consumer. This can range from dis-information about consumer rights and inter-regional compatibility issues right through to racial and xenophobic hysteria.
Exploitation of regional differences: The product makes use of regional differences that makes it difficult or impossible to use in an alternate region. This can include subtle techniques such as instruction books in a single foreign language or a technical incompatibility that prevents the product from being used in regions that have different power, telephone or other connections.
Cosmetic regional variations: The product is slightly different in different regions, in order to make it difficult to recognize or compare like products. The variations can range from different product naming and model numbers to changes in appearance and function. More extreme variations include adding high price, low cost, 'features' to products sold in regions that support high prices. In high price regions it is often impossible to purchase the simple or inexpensive version of the product.
Purchase and transfer restrictions: The product is assigned to a specific user at the time and location of purchase. It may only used in the country of purchase and cannot be transferred to others. Airline tickets are a typical example. Your airline ticket is priced accourding to the country in which your journey is started. This is usually where the ticket is purchased. Other travellers making the same journey in the opposite direction may pay a completely different price for the same travel conditions, yet sit right next to you in the same plane.
Guarantee and service restrictions: Guarantee work and service is only available in the region in which the product is purchased. The product must be returned to the original region, or in extreme cases to the original point of sale, for repairs or replacement. The guarantee is void and service is unavailable or prohibitively expensive outside the region of sale.
Region codes: Technical mechanisms that only allow the product to be used in the region of sale. A typical example is the DVD, which may only be viewed on players where the player's region code matches that of the DVD. There are currently rumors that companies may introduce region codes in computer perpherials and video games.
Regulation:
Regulations that prevent the use, transfer (import barries and export
prohibitions), modifiction, reverse engineering or other activities that
enable the use of the company's products in other regions. Companies
sometimes enguage in intense lobbying efforts, and in some cases even outright
bribery, to encourage the enactment of such regulations.
Global
corporations are often able to exert considerable pressure on the governments
of smaller and poorer countries.
Regulatory bodies and goventments also have conflicting interests. While most governments have organizations dedicated to protecting consumer interests, a government may decide these are a secondary consideration and allow corporations considerable freedom in exchange for a what they perceive as a better chance for economic growth.
Interestingly, not all companies are interested in preventing arbitrage. Preventing arbitrage requires effort. It may be better to maintain profits by reducing costs and eliminating costly regional product variations. A company doing so may even gain market share at the expense of its competitors, since barriers to arbitrage are generally unpopular with customers. Intelligent international companies will be proactive in their pricing and will embrace an simplified international pricing strategy. This will help them reduce costs rather than suffer the increased costs caused by trying to eliminate arbitrage opportunities.
The exact result is difficult to predict. As has happened before globalization,
companies and consumers will evolve
elaborate strategies in their attempts to maximize their gain. One thing
is certain. While globalization is creating forces that
reduce regional price variations,
it will never completely eliminate them.
