The Evolution of Price Dispersion in the European Car Market

Pinelopi Koujianou Goldbe and Frank Verboven
Authors registered in the RePEc Author Service: Pinelopi Goldberg ()

No 6818, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Car prices in Europe are characterized by large and persistent differences across countries. The purpose of this paper is to document and explain this price dispersion. Using a panel data set extending from 1980 to 1993, we first demonstrate two main facts concerning car prices in Europe: (1) The existence of significant differences in quality adjusted prices across countries, with Italy and the U.K. systematically representing the most expansive markets; (2) Substantial year-to-year volatility that is to a large extent accounted for by exchange rate fluctuation and the incomplete response of local currency prices to these fluctuations. These facts are analyzed within the framework of a multiproduct oligopoly model with product differentiation. The model identifies three potential sources for the international price differences: price elasticities generating differences in markups, costs, and import quota constraints. Local currency price stability can be attributed either to the presence of a local component in marginal costs, or to markup adjustment that is correlated with exchange rate volatility; the latter requires that the perceived elasticity of demand is increasing in price. We find that the primary reason for the higher prices in Italy is the existence of a strong bias for domestic brands that generates high markups for the domestic firm (Fiat). In the U.K. higher prices are mainly attributed to better equipped cars and/or differences in the dealer discount practices. The import quota constraints are found to have a significant impact on Japanese car prices in Italy, France, and the U.K. With respect to local currency price stability, 2/3 of the documented price inertia are attributed to local costs, and 1/3 to markup adjustment that is indicative of price discrimination. Based on these results, we conjecture that the EMU will substantially reduce the year-to -year volatility observed in the car price data, but without further measures to increase European integration, it will not completely eliminate existing cross-country price differences.

JEL-codes: F0 L0 (search for similar items in EconPapers)
Date: 1998-11
Note: ITI
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Related works:
Working Paper: The Evolution of Price Dispersion in the European Car Market (1998)
Journal Article: The Evolution of Price Dispersion in the European Car Market (2001)
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