Final answer:
A European-based company should not use market penetration or skimming pricing to preserve margins when the euro strengthens against the dollar. Instead, they should consider hedging against exchange rate risk and optimizing operations.
Step-by-step explanation:
When the euro strengthens relative to the dollar, as it did from July 2001 to November 2007, a European-based global company that exports to the U.S. market faces a challenge. The value of the dollar declines in comparison to the euro, leading to a situation where the revenue generated in dollars translates to fewer euros when converted back to the company's home currency. In the example provided, a French firm incurring €10 million in costs while selling its products in the U.S. for $10 million would suffer a larger loss when the euro strengthens because the conversion back to euros results in less income.
If the company wants to preserve margins given the stronger euro, it should not adopt a policy of market penetration pricing nor use skimming pricing. Market penetration pricing, which involves setting a low price to attract a larger number of buyers and a larger market share, could exacerbate the losses when the euro is strong. On the other hand, skimming pricing, which sets prices high initially and then lowers them over time, could make the products uncompetitive if the exchange rates are unfavorable.
Instead, the company should explore strategies such as hedging exchange rate risk, increasing operational efficiency, or possibly adjusting their product mix to maintain profitability in the face of changing exchange rates.