Car price differentials in the European Union
1. What are the sources of significant price differentials in the EU automobile market?
The difference in products’ prices observed among the twenty-seven countries of the EU2, with no doubt, has a various number of causes. Some of the key reasons, on our opinion, are first, Tax, Members of the EU have different tax policies in most products as automobiles. This difference is a significant division, in some cases over half, of the purchasing price of cars among EU members3. Countries with high taxes, although, have lower pre-tax prices in order to create a reasonable purchasing price.4 Second, exchange rate inconstancy, the changes in exchange rate between the members of the European Union which use a national currency other than Euro, is an important issue against fixing the prices in all twenty seven states. For instance, the depreciation of the British Pound and its later appreciation in the 1990’s had a noticeable impact on car price changes in the UK5. Third, transportation costs, shipping costs in the case of delivering a car from an EU state to another, increases the price gradually in far destinations.
Fourth, local expenses, such as employee wages and commercial payments vary among different EU members, which influence the fixed costs in car industries in the country of origin and therefore, the overall price. Fifth, elasticity of demand, the citizens of the EU carmanufacturing members, when purchasing a car, mostly care about the reputation of the brand than the price, while when buying a non-domestic car their first issue is the price. Nevertheless, when the price of, say, a German car manufacturer rises, consumers are more likely to switch to another German car manufacturer rather than switching to a brand of a different EU member 6. Sixth, border effect, transporting a product within a state takes much shorter time than between two states, even if the distance of the cities in the same state is longer 7. Seventh, purchasing power, the GDP and the national welfare of different states are not the same. In a country where citizens have lower relative income, the price of a car would consequently be lower. Eighth, manufacturer price strategies, the policies taken to account by firms are somewhat different and this can also lead to a price differential. 8 Last but not least, technical requirements, for instance RHD9 regulations in the UK, may give a rise to the cars’ prices10.
2. In a pure single market would these price differentials exist? By what process might price differentials be eradicated?
We can assume that in a pure single market, all the states in the European Union would in most perspectives, be considered as a single country. Therefore, there would be no exchange rate 1 Charles W.L. Hill, Global Business Today, Fifth ed., Chapter 8, p.293 2
Pinelopi K. Goldberg and F. Verboven, The Evolution of Price Dispersion in the European Car Market, 2000, p.5. 4
Alan Kirman and Nathalie Schueller, Price Leadership and Discrimination in the European Car Market, 1990, p.1. 5
Francesco R. Silvente and James Walker, The impact of exchange rate fluctuations on profit margins: The UK car market from 1971 to 2002, 2005, p.1. 6
Hance degryse and Frank Verboven, Car price differentials in the European Union: An economic analysis, An investigation for the competition directorate-general of the European commission, 2000, p.40.
Carolyn L. Evans, The Economic significance of national border effects, 2000, P.1. 8
Right Hand Driven
since they would have the same currency. Free movement of labor would unify the wages and the purchasing power consequently. Borders would be eliminated and transportation would be done much easier and cheaper. The entire EU would have the same production legislations and the manufacturers would also compete in a common market and with the same pre-tax price. In a market with the mentioned characteristics, the range of price differences will certainly narrow significantly.
Changing the factors mentioned in the first question will certainly result in price dispersion reduction and some existing policies simplify this process. Harmonized tax across the EU states makes pre-tax car prices equal. Transportation costs will also reduce due to having no borders. This is also for countries like the UK, which have different currency than Euro, joining the EMU11 would eliminate the price differentials risen from the exchange rate fluctuations. Implementing a common market across the EU members, in which labors can move freely, would unify the local costs such as wages and rents12. Applying RHD adjustment can also be an effective way of reducing the overall automobile price13. New technologies such as the internet similarly force the car prices to be unified by making the prices more transparent.
3. Why do you think the United Kingdom is one of the most expensive car markets in Europe?
First of all, the UK is not an EMU member and has not accepted Euro as its national currency so unlike the EMU members, the problem of exchange rate fluctuation, mentioned in the first question, is still present. For
instance, appreciation of GBP14 against Euro by 10.3% in 2010 made the prices in the UK relatively higher than the prices in other EU members 15. Furthermore, firms which have RHD as an option for their produced cars, face an additional cost and therefor have an extra price. On one hand, UK government receives almost 50% income tax rate which is fairly high among the EU members, fourth in ranking, on the other hand, GDP per capita in the UK was also 20832.79 in 201216 and therefor, the purchasing power of the citizens is also above the European average causing relatively high prices for goods in the UK.
4. What do you think will happen to price differentials in the EU automobile market under the new regulations that took effect in September 2005? This new regulation provides some major changes in the car market among EU states. For instance, unlike before, dealers are now allowed to sell multi-brand automobiles anywhere they desire17. The consumers are free to purchase among a wider range of car brands and also have their services and repairs done at any workshop they wish18. As a result, the cost for 11
Economic and Monetary Union
Hance degryse and Frank Verboven, Car price differentials in the European Union: An economic analysis, An investigation for the competition directorate-general of the European commission, 2000, p.15.
Great Britain Pound sterling
One Pound sterling, the UK currency, is approximately equal to 1.176 euros at the present time. www.tradingeconomics.com/united-kingdom/gdp-per-capita
Charles W. L. Hill, Global business today, 5th ed., p.321
consumers decreases and competition among same brand automobile manufacturers and also among automobile repair centers rises. Accordingly, the car price differentials decrease19.
5. What will the impact of these new regulations be on (a) competitive intensity in the EU automobile market and (b) the profitability automobile operations in the EU?
As mentioned in the previous question, with new regulations consumers are now unrestricted and can choose from a number of brands no matter what EU country they purchase in. this is true also from the dealers’ point of view, which can benefit from selling any brand anywhere. Both these results of the new regulation lead to market integration and higher competition in the EU automobile market. The opportunity to choose from a wide range of brands with different land of origins for the EU consumers leads to a higher demand for the overall automobile market in the EU which suppliers can benefit from 20. As a sum-up, the suppliers, dealers and the end customers can enjoy a more balanced welfare in the new regulation compared to the previous one.
6. Which automobile companies will do best in the post-2005 environment? After September 2005, when the new regulations takes full effect, the competition among automobile manufacturing companies all around the EU will enter a new era. In the new atmosphere, companies who can provide more affordable vehicles will win the battle. Consumers now have a various number of car manufacturing companies from all around the EU to choose from and therefor, will choose the company who is offering a higher quality automobile with a relatively lower price. At this moment that dealers can sell any brand, anywhere, marketing plays a key role in a company’s advantage. In other words, a company should now closely monitor the demand of different EU countries for different types of cars in order to provide
them the desired car and consequently benefit from the consumption surplus. For instance, countries with a relatively high age average usually have a higher demand for small cars compared to the countries with a low age average. Worth mentioning, fixed cost play an important role in the products final price and so, in a competitive market, should be reduced as much as possible.
Sandra M. Colino, Northwestern Journal of International Law & Business, vol. 28, On the Road to Perdition? The Future of the European Car Industry and Its Implications for EC Competition Policy, Fall 2007, p.38. 20
Sandra M. Colino, Northwestern Journal of International Law & Business, vol. 28, On the Road to Perdition? The Future of the European Car Industry and Its Implications for EC Competition Policy, Fall 2007, p.40.