#99 Global Price Discrimination Still Works
In the past few months, U.S. federal prosecutors have cracked down on shipments of high end cars to China. Dozens of luxury vehicles at U.S. ports and millions of dollars in U.S. bank accounts have been seized. What had happened? Are U.S. car manufacturers no longer interested in the Chinese market? Not at all! The seized cars were mostly BMWs that were purchased by straw men and their “employers”in the U.S. for resale on the grey market in China. With a sticker price for a BMW X5 xDrive 35i of around $56,000 in the U.S. and around $153,000 in China – almost three times as much – there’s a huge potential for profitable wheeling and dealing between the two countries. Driven by their need for status and prestige, Chinese consumers are willing to pay the price for a foreign luxury car, and BMW and other manufacturers naturally want it all for themselves, and so they have taken legal action. All legal aspects aside, what’s interesting is that this is a perfect case of global price discrimination / differentiation – volume positioning in the U.S. and premium positioning in China. Based on the cultural conditions in the local environment, global companies are leveraging these price differentials to their advantage and – as has been shown in this case – are trying to protect this advantage as long as possible.
March 16, 2014 @ 10:42 am
The price difference is impressive and BMW also overweighed the factor of ‘willingness to pay’ from the customers. Such a price difference is a solid basis for any arbitrage business. The question is now, what will BMW do? Their export strategy is clear, to get a premium segment in the external markets. On one hand the premium is covering all additional risks and on the other hand they keep the margin high. Now, once it is obvious that there is a price discrimination, who they can adopt the price? Better would be to adopt the product to have specific parameters where customers in China are not willing to pay. This could stop the arbitrage business on one hand and keep their market strategy for premium customers on the other hand.
Who is doing different? The next interesting market entering will come from Tesla Motors, a pure Electric Car Producer in the premium segment. As the price in the domestic market is already higher compared to a BMW maybe the premium will not that high. And they announced already, that they would have a fair pricing for this market.
April 6, 2014 @ 2:10 pm
First I had the same thought as Erwin about the arbitrage subject as it seems an interesting topic for.
Also the matter of pricing was a second thought as we pay in EU about 56 thousand Euros for a BMW X3.
We have this experience also with other products just in comparison of Austrian and German produced products i.e. Riedel wine glasses. You pay for a Bordeaux glass in Austria €16.99 and in London £36. So it is not unusual that the products cost differently.
The legal action could be a nice supportive one of the USA authorities as BMW have just established and pulled the start knop for an additional production plant at USA/Spartanburg. In Spartanburg BMW is producing cars since 1994. BMW will produce now the X3 worldwide just in USA/Spartanburg. 15.000 new X3 cars will leave each month the factory. Therefore BMW will deliver the X3 from USA to China.
Therefore the grey market is not in the sense either of the authorities as they try hard not to lose more workplaces to Asia as for BMW.
Interested in this sense is that the unions of USA just now were able to block a law of the White House to get the Free Trade Agreement with the European Union on the fast track. The main argument is that they would like to assure not losing more workplaces abroad.
May 23, 2014 @ 11:35 am
In the case of BMW, straw men and their “employers” bought BMW cars relatively cheap on the U.S. market with the intention to resell them for a price three times higher in the grey market of China. Due to the very high profit margin, criminals were encouraged to exploit this business opportunity, which had a direct negative impact on the worldwide automobile industry. As a result, U.S. federal prosecutors seized dozens of luxury vehicles at the U.S. Ports and their U.S. bank accounts to protect the big car manufacturer from further financial losses.
When talking about global price discrimination, one always has to bear in mind that a company can only set a high price level if there is a sufficient number of costumers willing to pay this amount. So why is there still so much profit generated in the Chinese market, even though the prices are obviously set too high? Or to keep this question more general: Why let costumers discriminate themselves in terms of the price?
To answer this question it is important to analyze the motives based on culture, which are especially important in the case of China. The Chinese society highly values prestige and status and it is very rewarding to show in public what one can afford. In contrast to Europe this behavior widely accepted and even desirable . Following the quote “The bigger, the better”, expensive cars are an indispensable accessory of the rich and modern Chinese business men and no matter what they cost – the demand is continuously high.
In general, high prices do not breach the law. It lies within the power of company to set the price according to its strategy of either cost leadership or differentiation. Either or, the main target of a company remains the same: to generate the highest possible profit. Price differentiation does therefore correspond to the principle that the demand determines the price and of course the other way around.
A company, which is operating in various markets on a global scale, has the possibility to position itself differently from country to country. In the U.S., the market does not allow BMW to set the price too high, therefore they are forced to follow a quantitative strategy. In contrast, the market in China highly appreciates the western automobiles, which allows BMW to position itself as a quality leader and to charge much higher prices.
November 11, 2015 @ 9:59 am
Dear all,
I am not aware of the legal situation in this case because I don’t know if it is allowed or not to buy a BMW and sell it more expensive to others. But if I were the BMW manufacturer I would do everything to stop this arbitrage business because it could damage the image and the reputation of BMW.
But the U.S. car distributors did well, because they found out that the Chinese people always try to show their status in public and their power. This is a phenomenon which could be traced back to Hofstede’s Cultural Dimensions. Hofstede’s model says that there is a higher power distance in China than in Europe and in the U.S. which means that the Chinese are driven by their need for status and prestige. So if a person in China buys a BMW all the others around him know that he is driving such a luxury car and he catches attention. BMW is positioned in the high price segment and also known for good quality. If there is a potential to sell the car more expensive in China BMW would aim to keep the margin all for itself and not sharing it with an intermediary. But is such a high price discrimination or differentiation valuable for the reputation of the company? I don’t think so because such a high difference of $97,000 could destroy the reputation and triggers maybe negative word of mouth. In my opinion BMW could sell the cars on the Chinese market more expensive than for example in Europe but they should not overact and try to reach for an impossible pricing. So a higher price would be ok if the Chinese people are willing to pay the price difference. In China they very appreciate the cars of Western Europe which allows BMW to charge higher prices than in other parts of the world.
Furthermore it is very interesting for me why BMW never tried to increase the price in China before? Why have the U.S. car distributors taken such a high risk? Hofstede explained this phenomenon in his four dimensions as well. It is verified that the Uncertainty Avoidance Index in Germany is much higher than in the U.S. While the Germans prefer detailed plans and try to implement them precisely the Americans are more chaotic, try to come up with new ideas and stand for fast-paced experimentation.
In the end I’d like to summarize the main points again: Cultural differences always influence businesses at all decisions and actions. For me BMW missed a chance to earn higher profit margins but I’m sure that the company will try to avoid such misadventures in the future.
April 9, 2019 @ 9:41 am
Dear all,
These enormous price differences are just calling for creative “business models”. In my opinion price discrimination is just the side product of willingness of the market to pay the high price. In the case of BMW if the market is accepting the price and if the sales are according to plan then BMW is doing the smart thing. But according to the article by Poplin price discrimination cannot be marked as only a bad thing. A pharmaceutical example is given. Using price discrimination for drugs enables the availability and affordability of drugs throughout the world. Pharmaceutical companies are determining the price by purchasing power and the level of income. Higher price markets cover the cost of lower prices in other markets. The author of the article states that price discrimination is good for global health. But as in the BMW case, this can be used to make a profit if drugs that have high price differences are purchased and sold on a gray/black markets.
Source: Kyle Poplin, 17th September 2014, How Price Discrimination is Good for Global Health (Part 1): Professor Patricia Danzon of The Wharton School discusses differential pricing in pharmaceuticals, https://nextbillion.net/danzon-market-dynamics/
February 21, 2021 @ 6:04 pm
Dear all,
the question of why BMW is selling its cars with different pricing strategies lies on the hand: They analyze the market based on how much of the cars they can produce with the maximum profit range.
Another example is the pricing strategy comparing Germany to the US market. Here, BMW and all the other European automobile manufacture are selling their prestige vehicles up to 30 -40% cheaper compared to the German market. For example, the BMW X 5 in its basic performance is currently priced in Germany with 72.250 €, 49.000 € on the US market and 104.000 € on the Chinese market.
Why cheaper in the US? Because with the prices that manufacturers such as Volkswagen, Audi, BMW, or Mercedes can call up in Europe, it can be hardly sold in the land of unlimited car possibilities.
Why more expensive in China? Because a few customers are willing to pay these prices for German premium vehicles. As long as the demand will not decrease, BMW will not change their pricing strategy.
Best,
February 12, 2022 @ 8:47 am
For the case of seizing dozens of luxury vehicles at U.S. ports and millions of dollars in U.S. bank accounts, it could protect the profits of the BMW. It also is good to protect all the international companies. Most of international companies have the problems of global price discrimination, because the companies should make price based on a lot of factors, such as the environment of market, culture, demand, and supply. For example, in Russia, milk and dairy products are very cheap because there are too many pastures. However, when the Russian dairy products enter into the Chinese market, the price could be twice to four time, because China does not have enough pastures and Chinese customers like import products. Most of middle-class families are willing to pay the high price to buy import products. In addition, the cost of the dairy products sold in China will become higher than one sold in Russia, because of the transportation and inventory. The BMW has the similar condition. It has the strong competition as the luxury cars and Chinese customers are willing to pay the high price. The BMW has the high cost of sale in China. For example, all the BMW’s stores are the best place and high rent cost. It offers better service than other cars’ companies. It spends more budget in promotion. A lot of reasons result in that the price in China is higher than one in America, so the price discrimination appears. The high profits make straw men and their “employers” in the U.S resale on the grey market in China. It could make the BMW lose a large market in China and get a loss.