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Cross-country price dispersion in the euro era: a case study of the European car market

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  • Pinelopi Koujianou Goldberg
  • Frank Verboven

Abstract

type="main" xml:lang="en"> This paper investigates the effects of the European monetary union on cross-country price differences in the European car market. The analysis utilizes disaggregate, bi-annual data on the prices of almost all car models sold in the 15 countries of the European Union over 1993–2003. The data refer to identical models, with identical specifications and options. To identify the euro's effect, we exploit the fact that out of the 15 countries in our sample, 12 joined Euroland at the beginning of 1999 and officially adopted the euro as their national currency at the beginning of 2002, while 3 countries remained outside the monetary union. We investigate whether there is a systematic difference in the evolution of cross-country price dispersion between Euroland members and non-members after 1999. Our analysis distinguishes between Phase I (monetary union with national currencies preserved, 1999–2001) and Phase II (official adoption of the euro as a national currency in 2002). We examine the evolution of both the absolute price differentials across countries, and the speed with which deviations from the long-term cross-country differentials are eliminated. We find that in the pre-euro era, countries that later joined Euroland exhibited lower price differentials relative to the base country of the Netherlands, by approximately 6%. The monetary union further reduced these differentials by a small but significant percentage (about 1.5%) between 1999 and 2001; this reduction happened while the price differentials in non-Euroland countries increased. The price differentials in Euroland countries further decreased following the official euro adoption in 2002. However, we cannot attribute this decline to the euro, as we witness an even faster decrease of price differentials in non-Euroland countries over the 2002–2003 period. Despite these reductions, cross-country price differences remain large, even among members. Regarding the speed of convergence, we find that even before 1999 the half-life of price shocks was shorter in Euroland countries compared to non-Euroland countries (0.65 versus 1 year). However, we do not find any evidence that the EMU further affected the speed of convergence in a significant manner. Overall, our results suggest a big role for exchange rate stability in reducing international price dispersion and a smaller role for a common currency. The surprisingly high remaining international price differentials after the euro suggest the need for additional measures towards integration (e.g., liberalization of the distribution system, reduction of high registration taxes in particular countries). — Pinelopi Koujianou Goldberg and Frank Verboven

Suggested Citation

  • Pinelopi Koujianou Goldberg & Frank Verboven, 2004. "Cross-country price dispersion in the euro era: a case study of the European car market," Economic Policy, CEPR;CES;MSH, vol. 19(40), pages 483-521, October.
  • Handle: RePEc:bla:ecpoli:v:19:y:2004:i:40:p:483-521
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    File URL: http://hdl.handle.net/10.1111/j.1468-0327.2004.00130.x
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    Cited by:

    1. Wolfgang Sofka & Joerg Zimmermann, 2007. "Regional Dimensions of Liability of Foreignness: Between a Rock and a Hard Place?," Jena Economic Research Papers 2007-023, Friedrich-Schiller-University Jena.
    2. Christian Dreger & Konstantin Kholodilin & Kirsten Lommatzsch & Jiri Slacalek & Przemyslaw Wozniak, 2007. "Price Convergence in the Enlarged Internal Market," Discussion Papers of DIW Berlin 730, DIW Berlin, German Institute for Economic Research.
    3. Salvador Gil-Pareja & Simon Sosvilla-Rivero, 2007. "Price convergence in the European car market," Applied Economics, Taylor & Francis Journals, vol. 40(2), pages 241-250.
    4. Waights, Sevrin, 2018. "Does the law of one price hold for hedonic prices?," LSE Research Online Documents on Economics 86418, London School of Economics and Political Science, LSE Library.
    5. repec:eee:reveco:v:54:y:2018:i:c:p:154-164 is not listed on IDEAS
    6. Kaiser, Ulrich & Sofka, Wolfgang, 2006. "The pulse of liability of foreignness: dynamic legitimacy and experiences effects in the German car market," ZEW Discussion Papers 06-070, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    7. Dvir, Eyal & Strasser, Georg, 2018. "Does marketing widen borders? Cross-country price dispersion in the European car market," Journal of International Economics, Elsevier, vol. 112(C), pages 134-149.
    8. Vlad Radoias, 2015. "The myth of the domestic brand bias for automobiles in the European Union," Economics Bulletin, AccessEcon, vol. 35(1), pages 70-82.
    9. Andrén, Niclas & Oxelheim, Lars, 2006. "Producer Prices in the Transition to a Common Currency," Working Paper Series 668, Research Institute of Industrial Economics.
    10. Sofka, Wolfgang & Zimmermann, Jörg, 2005. "There's no Place Like Home: A Strategic Framework to Overcome Liability of Foreignness in the German Car Market," ZEW Discussion Papers 05-84, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    11. Sofka, Wolfgang & Zimmermann, Jörg, 2008. "Regional economic stress as moderator of liability of foreignness," Journal of International Management, Elsevier, vol. 14(2), pages 155-172, June.
    12. Belleflamme,Paul & Peitz,Martin, 2015. "Industrial Organization," Cambridge Books, Cambridge University Press, number 9781107069978.
    13. Wells, Peter & Varma, Adarsh & Newman, Dan & Kay, Duncan & Gibson, Gena & Beevor, Jamie & Skinner, Ian, 2013. "Governmental regulation impact on producers and consumers: A longitudinal analysis of the European automotive market," Transportation Research Part A: Policy and Practice, Elsevier, vol. 47(C), pages 28-41.
    14. Christian Dreger & Konstantin Kholodilin & Kirsten Lommatzsch & Jiri Slacalek & Przemyslaw Wozniak, 2007. "Price Convergence in the Enlarged Internal Market," Discussion Papers of DIW Berlin 730, DIW Berlin, German Institute for Economic Research.
    15. Vlad Radoias, 2016. "Direct and indirect price discrimination in the automotive industries of the European Union," Empirical Economics, Springer, vol. 50(3), pages 975-990, May.
    16. repec:eee:inecon:v:110:y:2018:i:c:p:135-150 is not listed on IDEAS
    17. Riemer P. Faber & Ad C.J. Stokman, 2005. "Price Convergence in Europe from a Macro Perspective: Product Categories and Reliability," DNB Working Papers 034, Netherlands Central Bank, Research Department.
    18. Simón Sosvilla-Rivero & Salvador Gil-Pareja, 2012. "Convergence in car prices among European countries," Applied Economics, Taylor & Francis Journals, vol. 44(25), pages 3247-3254, September.
    19. Fischer, Christoph, 2012. "Price convergence in the EMU? Evidence from micro data," European Economic Review, Elsevier, vol. 56(4), pages 757-776.
    20. Nitsch, Volker & Berger, Helge, 2015. "Measuring economic and institutional integration," Darmstadt Discussion Papers in Economics 225, Darmstadt University of Technology, Department of Law and Economics.

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