In September 1992, Dow Chemical reacted to the currency chaos in Europe by switching to Euro pricing for all its products in Europe. The purpose, said a Dow executive, was to shift currency risk from Dow to its European customers. Moreover, said the Dow executive, the policy was fairer: By setting the same DM price throughout Europe, Dow’s new policy would nullify any advantage that a Dow customer in one company might have over competitors in another country based on currency swings.
- What is Dow really trying to accomplish with its new pricing policy?
- What is the likelihood that this new policy will reduce Dow’s currency risk?
- How are Dow’s customers likely to respond to this new policy?
- What is Dow really trying to accomplish with its new pricing policy?
Answer. Dow was really trying to raise its prices in those European counties whose currencies devalued so as to preserve its dollar margins, which were eroding from the devaluations.
- What is the likelihood that this new policy will reduce Dow’s currency risk?
Answer. Not very likely. Unless all its leading competitors go along with Euro pricing (its U.S. and foreign competitors said that they wouldn’t follow Dow but would continue doing business in local currencies), Dow will have to cut its Euro price every time the Euro appreciates or else lose market share. In other words, Dow can’t use Euro pricing to avoid margin erosion when European currencies devalue against the dollar unless it is willing to sacrifice market share.
- How are Dow’s customers likely to respond to this new policy?
Answer. They will simply demand lower Euro prices if their currencies devalue. If Dow doesn’t cut its Euro prices, many of them will buy from those of Dow’s competitors who are willing to cut their dollar or Euro prices.
