Chapter 5. Price formation in the world markets
5.1. Features of pricing in the world market
The world market, characterized by particularly tough competition, imposes a certain imprint on the pricing process. The level of price is influenced by the characteristics of each industry market, its type, availability and number of intermediaries, existing discount systems, sales volumes and so on.
All the variety of economic factors affecting world prices can be conditionally combined into several groups:
- general economic (the phase of the economic cycle, demand and supply, the level of inflation, etc.);
- associated with the production of a particular product (costs, profits, tax levels, consumer properties of the goods, supply and demand);
- specific, which are associated only with certain types of goods and services (seasonality, guarantees, etc.) or with the peculiarities of monetary policy.
In addition to economic, prices can also be influenced by political or military factors.
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The level of prices for each product in the world market is determined taking into account the specific market situation and, first of all, depends on the correlation of supply and demand, as well as the level of competition in this market. For the world price take the prices of large export-import transactions, concluded on world commodity markets. Typically, these are transaction prices between the largest sellers and buyers or the prices of major shopping centers, such as the London Metal Exchange or the Chicago Board of Trade. The rest of the market participants at the conclusion of transactions are guided by these prices.
Deviations are possible from the world price level. So, if under the influence of demand, some buyers are willing to pay for the product more than the market price, then the seller uses the price policy of "skimming cream", setting a higher price on the product. Subsequently, as the market saturates the commodity, prices are usually reduced. For the goods of a well-known company that enjoys the trust of customers and provides a consistently high quality, prestigious prices can be set
For durable goods sold in the markets for a long time, several types of prices can be set: sliding (decreasing as the market becomes saturated), long-term unchanged, flexible (changing under the influence of supply and demand) and contractual, providing a system of discounts.
As in the domestic market, there are seller prices and buyer prices on the world market. Depending on the market situation, the seller's market is formed - where there is excessive demand and where the prices in this case dictate the seller, or the buyer's market, because of the excess supply the buyer dominates and it dictates the prices. But such situations that arise in the markets, as a rule, are short-lived.
Pricing in world markets depends largely on the type of market. Depending on the number of subjects of trade and the nature of competition, the market of perfect competition, pure monopoly, monopolistic competition and the market of oligopolistic competitors are distinguished.
In the market of perfect competition, which is characterized by a large number of buyers and sellers and homogeneous products, prices tend to converge. This is facilitated by the desire of sellers to get the maximum profit: the seller slightly reduces prices, increasing the volume of supplies, and due to this, receives a large mass of profit and maintains its position in the market.
The market of pure monopoly is the market of one seller, which varies the prices, supplying a different number of products depending on demand. As a rule, the monopolist in advance legally secures its right to supply products to the markets of foreign countries, not allowing the competitor to penetrate them. To increase sales, he uses the method of price discrimination, changing the price depending on the importing country. In the world market there are relatively few such markets.
In the markets of monopolistic competition, sellers are both large producers and less powerful firms. Prices in these markets are formed on a competitive basis, but with elements of monopoly. In the event that large producers start to raise prices, there are always smaller competitors ready to sell similar products at lower prices. According to these principles, there is competition in the modern market among manufacturers of interchangeable goods.
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The oligopolistic market is represented by several large producers - suppliers of goods with significant market segments. These firms and importing countries, as a rule, conclude cooperation agreements. Between themselves, these firms enter into unspoken agreements on the division of markets, prices and volumes of production. The need to maintain a certain stability in such markets led to the creation of international cartels that determine the price policy and coordinate the volume of production.
Each manufacturer, entering the world market, should have an idea of the type of this market, the types of prices and their levels. At the present time, special data banks have been created for all types of goods and commodity groups by regions and time periods. Similar references can be obtained on the Internet, but it must be borne in mind that all prices in this case are indicative, reference nature.
The prices in the world market exist in several types.
Contract price - the price agreed between the seller and the buyer in the negotiation process. It is usually lower than the seller's price, does not change during the entire duration of the contract and is a trade secret.
Reference price - the price of the seller, published in special reference publications and in periodicals. But it must be taken into account that there is always a certain difference between reference and actual prices. As a rule, reference prices are always overestimated, as they do not react to changes in the market situation.
Exchange prices - prices for goods sold on commodity exchanges. Basically it is raw materials and semi-finished products. Such prices quickly reflect all the changes that have occurred in the markets. But since the exchange prices do not take into account the terms of delivery, payment and a number of other factors, these prices do not fully reflect the real trends in price changes.
Auction prices - prices established as a result of bidding. They really reflect the demand and supply of goods in this period.
Statistical foreign trade prices - average prices published in various statistical compilations. According to them, it is possible only to trace the dynamics of changes in prices and foreign trade, for individual market participants they can serve only as a guide.
When determining the price, two methods are used: total costs and direct costs. The full cost method includes the summation of all costs for the production and sale of products plus the estimated profit. The method of direct costs provides for the division of all costs into direct and overhead costs. Overhead costs (conditionally-constant) practically do not vary depending on volume of production, and direct (variables) completely depend on volume of made production. A certain profit is added to the sum of these costs.
Production costs are the basis for determining the prices of manufactured products. The price of raw materials in world markets does not depend on the size of the costs of their extraction. It is influenced mainly by supply and demand, stock quotes and the position of individual states or their groups in the world market.
When determining a specific price for a product, the seller, depending on the situation on the market, can make concessions by giving the buyer a discount. In the world practice there are about 40 types of discounts. The most commonly used are the following:
- discount of the seller - given to a relatively permanent buyer or for the volume of a one-time purchase (up to 30%);
- discount & quot; cash discount & quot; -provided in case of full or partial prepayment of the goods;
- bonus discount- is given to a constant partner-buyer who correctly and timely fulfills all contractual obligations. Discount is given for annual sales.
In addition, there may be a discount for the purchase of off-season goods, as well as a dealer discount, that is, a discount to agents and intermediaries to cover sales costs.
When concluding a supply contract, the price may vary depending on what costs are included in the price of the goods, what the terms of delivery are. There are several such conditions.
1. Franco is the point of departure. In this case, the price is paid for the goods, which is located at the manufacturer in a certain starting point (warehouse, plant). All costs and risks before the acceptance of the goods by the buyer are borne by the seller, and the buyer pays all export taxes and other costs.
2. FOB (from the English free on board - free on board). The price includes all costs until the delivery of the goods to the vehicle. There are various options for selling on FOB terms.
Basic form - French-car - the specified point of departure. The seller provides loading of the goods on transport and is responsible for the goods before loading. Further payment for transportation and all other payments and services is provided by the buyer.
Another option is the French-car - the specified point of departure with prepaid transportation to the destination point. The buyer pays for transportation, the cost of which is included in the price of the goods.
There are several more options that suggest that transportation is paid by the buyer at the destination, that it is included in the bid price, etc.
3. FAS (free along the ship at the port of loading). The price of the goods includes the cost of its delivery to the point of departure and accommodation near the vehicle within the reach of its cargo devices, and in the absence of transport - in the place specified by the buyer. All costs associated with this, as well as the risk of damage and destruction of the goods prior to placing and delivery of it from the vehicle is borne by the seller.
4. CIF (from English cost, insurance, freigh - cost, insurance, freight). The price includes all costs associated with transportation and insurance of goods.
5. CAF are similar to CIF, only the insurance of the product against the risk of accidental loss or damage in the process of transportation is made by the buyer.
Thus, depending on the terms of sale, the specific price that will be determined in the contract changes.
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