Question

Because of local practices and competitive benchmarking, a company chooses a polycentric pricing strategy, and, in the foreign market, sets a product price that is significantly lower than what it charges domestically. Which of the following is a significant risk of choosing such a strategy?

i. Creation of gray markets, or arbitrage opportunities
ii. Lowering of profit margins
iii. Violation of dumping rules
iv. Consumer confusion
a. i and ii
b. ii and iii
c. i, ii, and iii
d. i and iv

Answer 1

c. i, ii, and iii

Step-by-step explanation:

Given - Because of local practices and competitive benchmarking, a company chooses a polycentric pricing strategy, and, in the foreign market, sets a product price that is significantly lower than what it charges domestically.

To find - Which of the following is a significant risk of choosing such a strategy?

Solution -

The correct option is - c. i, ii, and iii

Reason -

Due to adoption of polycentric pricing strategy company is charging different prices for the same local product which is generally in favor of company to earn more profits.

With the adoption, there might be arbitrage profits arises due to fluctuation of foreign currency receipts and when it charging a significantly lower charges it may realize in lower revenue than the revenue if it had been selling in local market.

While charging less price in competitive market, company will be able to capture a large market outside which in turn result in higher orders and thereby results in violation of dumping rules, as there is prohibition to dump in bulk in any other country than the volume in domestic market.