Final Activity Report Summary - PRICEDISCR (International Price Discrimination in the EU)
More than 15 years after introducing the European internal market, substantial differences in prices are still observed within the European Union, which cannot be explained by cost differences, but must reflect differing demand structures and varying intensities of competition for instance. The project studies important aspects of international price discrimination within the EU both theoretically and empirically.
On the car market, some patterns in price setting have been found in existing empirical studies. For instance, there is a home bias in demand leading to higher prices for domestic brands. Moreover, pretax prices are particularly low in countries with high registration taxes and no own car production. The tax is thus partially born by foreign car manufacturers meaning that import prices are low. The European Commission aims reducing the scope of the firms to price discriminate by enhancing arbitrage. One result of the research project is that - as long as the tax rate is fixed - limiting the scope for price discrimination will lower aggregate welfare in the EU as price discrimination mitigates the distortions emerging from the tax. Welfare rises, however, if the high tax rates are lowered in view of an increase of the hitherto low import prices and the already high tax-inclusive prices, which would amount to an indirect tax harmonisation. Moreover, enhancing arbitrage may come along with less trade, meaning that this kind of further market integration is not reflected in higher trade volumes.
In contrast, on food markets patterns of international price differences are still to be found. Naturally, there are countries with high and with low average prices, but the price differences show a large variation in addition and are not well understood yet. A conjecture is that the large price differences largely emerge in the retailing sector, as retailers apply different mark-ups on different products to cover their overhead costs.
The empirical part of the project studies international data on retail prices for food and aims at finding regularities, in which countries certain prices are particularly high or low. One hypothesis that has some theoretical support is that common products with a higher per capita consumption than elsewhere are fairly cheap. No clear evidence could be found on this point yet. However, combining the retail price data with data from the trade statistic, it could be confirmed that price differences emerge in the retail sector. Goods that were imported at the same price have different prices in the supermarket. In particular, this means that it cannot be expected that price differences will disappear by arbitrage.
On the car market, some patterns in price setting have been found in existing empirical studies. For instance, there is a home bias in demand leading to higher prices for domestic brands. Moreover, pretax prices are particularly low in countries with high registration taxes and no own car production. The tax is thus partially born by foreign car manufacturers meaning that import prices are low. The European Commission aims reducing the scope of the firms to price discriminate by enhancing arbitrage. One result of the research project is that - as long as the tax rate is fixed - limiting the scope for price discrimination will lower aggregate welfare in the EU as price discrimination mitigates the distortions emerging from the tax. Welfare rises, however, if the high tax rates are lowered in view of an increase of the hitherto low import prices and the already high tax-inclusive prices, which would amount to an indirect tax harmonisation. Moreover, enhancing arbitrage may come along with less trade, meaning that this kind of further market integration is not reflected in higher trade volumes.
In contrast, on food markets patterns of international price differences are still to be found. Naturally, there are countries with high and with low average prices, but the price differences show a large variation in addition and are not well understood yet. A conjecture is that the large price differences largely emerge in the retailing sector, as retailers apply different mark-ups on different products to cover their overhead costs.
The empirical part of the project studies international data on retail prices for food and aims at finding regularities, in which countries certain prices are particularly high or low. One hypothesis that has some theoretical support is that common products with a higher per capita consumption than elsewhere are fairly cheap. No clear evidence could be found on this point yet. However, combining the retail price data with data from the trade statistic, it could be confirmed that price differences emerge in the retail sector. Goods that were imported at the same price have different prices in the supermarket. In particular, this means that it cannot be expected that price differences will disappear by arbitrage.