Import Parity Pricing strategy
An Import parity pricing strategy is a product pricing strategy which aims to maximize profit by pricing a product or goods at or slightly below the full cost to import it from another country including relevant transportation costs and duties. This strategy is only viable when the costs to manufacture the product is less than the cost of importing it and pay the relevant taxes and duties.
This pricing strategy usually deters competitors both foreign and local to import the product from a neighbouring country that has low manufacturing costs. If the price of the product is too high in the home country, this may provide a valid business case to import the product profitably which would naturally bring the market close to its equilibrium point as an increase in supply from both local and imported sources would bring prices down to close to the import parity price and force some imports out of the market as they become uneconomic.
Import parity pricing industries and examples
Import parity pricing is usually seen in a few industries such as the cement industry, some minerals (depending on economic resources), plastics, basic garments, commodity type products such as basic building materials as well. It can be seen in these industries in mainly developed countries.
In some of these industries in some developed countries the cost of manufacturing some of the above products are very high and cannot compete from imported products from other parts of the world. In these cases the vast majority of the product will be imported but a small manufacturing industry may still exist in the home country producing the same or similar product but rely on differentiated products or the use of efficient manufacturing technology to be able to make a reasonable profit.
An example of this maybe the garment industry making white colour singlets, the majority will be made in countries with large garment industries such as India and China, but there may be small manufacturing firms in developed countries which will make these items out of top quality materials and sell them under a recognizable brand. This premium product will be superior from standard imported white singlets, and thus attract a higher price and provide the manufacturer a bigger profit margin.
Another example is the cement industry in a developed country. The example below shows the production costs and profit margins for an example manufacturing company in Australia. Figures are only approximate and for illustration purposes only.
Australian wholesale cement price: A$45 P/tonne
Australian Manufacture price: A$38 p/tonne
Australian Import parity price (Asia): A$43 P/tonne
The import parity price includes purchasing the cement in the manufacturing company, transport costs, and duties paid to import the product.
As can be seen the Wholesale price of cement in Australia in the example above has been priced at slightly above the import parity price from Asian producers, only A$2 P/tonne difference. This may not be an enough incentive to import the product and local customers will prefer to buy locally produced cement. This allows the local manufacturer to maximize its profit margin at the point where imports would not be economical into the local country.
Producers and importers are often updating their import parity models as movements in currencies, shipping costs and oversupply in some markets can shift the import parity price and thus changing the economics of importing products.
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