Price Setting Strategies of German Companies in Export Markets

The profit margin of German exporters remains largely unaffected by exchange rate fluctuations. In the case of a real appreciation of the DM, an average of 20 per cent of the appreciation - on the basis of 65 selected export products - is balanced by a decrease of the profit margin, while the remaining 80 per cent find expression on the foreign market in the form of a price increase. However, the percentage distribution varies according to the product and the country of import. These are the findings of a current study on price setting strategies on export markets between 1988 and 1994, carried out by the Centre for European Economic Research (ZEW) in Mannheim

Such an adjustment in the profit margin in the case of a real change of the exchange rate can be observed especially in countries of import, such as Japan, Italy, Spain, Finland and the United States. On an average, on the basis of 65 observed products, a ten per cent devaluation of the DM goes hand in hand with a three to four per cent increase in the profit margin when exporting to Japan. In the case of Italy and Spain, the appreciation of the DM at the beginning of the 90s was balanced by an almost six per cent decrease in the profit margin. When exporting to the USA, the majority of fluctuations in currency exchange rates are likewise balanced by changes in the profit margin. However, most foreign markets – in particular small markets and overseas markets – remain unaffected by this price setting strategy, since they only make up a very small share of total exports.

The ZEW study also clearly illustrates the connection between the change of the profit margin and the market share abroad. In this way, German exporters successfully maintained their market shares for certain products in Spain and Italy by price concessions. However, if they fully passed on the exchange rate fluctuations, the cost increases in the foreign currency would lead to a declining share in the respective markets.

Contact

Katrin Voss, E-mail: voss@zew.de