Does Marketing Widen Borders? Cross-Country Price Dispersion in the European Car Market

Pricing-to-market (PTM), the practice of differentiating the price of a good across markets, is commonly attributed to differential distribution and border costs. In this paper we show that some of this price differentiation is sustained by manufacturers selling different versions of an otherwise identical good in different markets. We study price differences across countries in the European car market, using a rich data set which includes detailed technical information on each car model. Relative car prices show no sign of convergence during the period 2003-2011. PTM is pervasive in this market: model-specific real exchange rates for mechanically identical cars differ significantly from unity. They also vary significantly across countries and, within countries, across car manufacturers. We find strong evidence that car manufacturers price discriminate by manipulating the menu of included car options and features available in each country, e.g. by including air conditioning as a standard feature as opposed to pricing it separately. We find that such bundling decisions sustain cross-country price differences of 10% and more.