IDEAS home Printed from https://ideas.repec.org/a/oup/restud/v68y2001i4p811-848..html
   My bibliography  Save this article

The Evolution of Price Dispersion in the European Car Market

Author

Listed:
  • Pinelopi Koujianou Goldberg
  • Frank Verboven

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 expensive markets. (2) Substantial year-to-year volatility that is to a large extent accounted for by exchange rate fluctuations and the incomplete response of local currency prices to these fluctuations. These facts are analysed 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 brancs 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, a large percentage of the documented price inertia can be attributed to local costs, and a smaller fraction 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.

Suggested Citation

  • Pinelopi Koujianou Goldberg & Frank Verboven, 2001. "The Evolution of Price Dispersion in the European Car Market," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 68(4), pages 811-848.
  • Handle: RePEc:oup:restud:v:68:y:2001:i:4:p:811-848.
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1111/1467-937X.00191
    Download Restriction: Access to full text is restricted to subscribers.
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Malueg, David A. & Schwartz, Marius, 1994. "Parallel imports, demand dispersion, and international price discrimination," Journal of International Economics, Elsevier, vol. 37(3-4), pages 167-195, November.
    2. Knetter, Michael M, 1989. "Price Discrimination by U.S. and German Exporters," American Economic Review, American Economic Association, vol. 79(1), pages 198-210, March.
    3. Victor A. Ginsburgh, 2003. "Art markets," Chapters, in: Ruth Towse (ed.), A Handbook of Cultural Economics, chapter 4, Edward Elgar Publishing.
    4. Pinelopi Koujianou Goldberg & Michael M. Knetter, 1997. "Goods Prices and Exchange Rates: What Have We Learned?," Journal of Economic Literature, American Economic Association, vol. 35(3), pages 1243-1272, September.
    5. Nevo, Aviv, 2001. "Measuring Market Power in the Ready-to-Eat Cereal Industry," Econometrica, Econometric Society, vol. 69(2), pages 307-342, March.
    6. Goldberg, Pinelopi Koujianou, 1995. "Product Differentiation and Oligopoly in International Markets: The Case of the U.S. Automobile Industry," Econometrica, Econometric Society, vol. 63(4), pages 891-951, July.
    7. Sven W. Arndt & J. David Richardson, 1987. "Real-Financial Linkages Among Open Economies," NBER Working Papers 2230, National Bureau of Economic Research, Inc.
    8. Steven T. Berry, 1994. "Estimating Discrete-Choice Models of Product Differentiation," RAND Journal of Economics, The RAND Corporation, vol. 25(2), pages 242-262, Summer.
    9. Mertens, Yves & Ginsburgh, Victor, 1985. "Product Differentiation and Price Discrimination in the European Community: The Case of Automobiles," Journal of Industrial Economics, Wiley Blackwell, vol. 34(2), pages 151-166, December.
    10. Kirman, Alan & Schueller, Nathalie, 1990. "Price Leadership and Discrimination in the European Car Market," Journal of Industrial Economics, Wiley Blackwell, vol. 39(1), pages 69-91, September.
    11. Smith, Alasdair & Venables, Anthony J, 1988. "Counting the Cost of Voluntary Export Restrictions in the European Car Market," CEPR Discussion Papers 249, C.E.P.R. Discussion Papers.
    12. Smith, Alasdair & Venables, Anthony J., 1988. "Completing the internal market in the European Community : Some industry simulations," European Economic Review, Elsevier, vol. 32(7), pages 1501-1525, September.
    13. R. Schmalensee & R. Willig (ed.), 1989. "Handbook of Industrial Organization," Handbook of Industrial Organization, Elsevier, edition 1, volume 1, number 1.
    14. Goldberg, Pinelopi Koujianou & Knetter, Michael M., 1999. "Measuring the intensity of competition in export markets," Journal of International Economics, Elsevier, vol. 47(1), pages 27-60, February.
    15. Robert C. Feenstra & James A. Levinsohn, 1995. "Estimating Markups and Market Conduct with Multidimensional Product Attributes," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 62(1), pages 19-52.
    16. Gagnon, Joseph E. & Knetter, Michael M., 1995. "Markup adjustment and exchange rate fluctuations: evidence from panel data on automobile exports," Journal of International Money and Finance, Elsevier, vol. 14(2), pages 289-310, April.
    17. Davidson, Russell & Dewatripont, Mathias & Ginsburgh, Victor & Labbe, Martine, 1989. "On the welfare effects of anti-discrimination regulations in the EC car market," International Journal of Industrial Organization, Elsevier, vol. 7(2), pages 205-230, June.
    18. Marston, Richard C., 1990. "Pricing to market in Japanese manufacturing," Journal of International Economics, Elsevier, vol. 29(3-4), pages 217-236, November.
    19. Victor Ginsburgh & Yves Mertens, 1985. "Product differentiation and discrimination in the European Community: the case of automobiles," ULB Institutional Repository 2013/1755, ULB -- Universite Libre de Bruxelles.
    20. Krishna, Kala, 1989. "Trade restrictions as facilitating practices," Journal of International Economics, Elsevier, vol. 26(3-4), pages 251-270, May.
    21. Knetter, Michael M, 1993. "International Comparisons of Price-to-Market Behavior," American Economic Review, American Economic Association, vol. 83(3), pages 473-486, June.
    22. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-890, July.
    23. Frank Verboven, 1996. "International Price Discrimination in the European Car Market," RAND Journal of Economics, The RAND Corporation, vol. 27(2), pages 240-268, Summer.
    24. Atkinson, A. B., 1997. "Measurement of Trends in Poverty and the Income Distribution," Cambridge Working Papers in Economics 9712, Faculty of Economics, University of Cambridge.
    25. R. Schmalensee & R. Willig (ed.), 1989. "Handbook of Industrial Organization," Handbook of Industrial Organization, Elsevier, edition 1, volume 2, number 2.
    26. Smith, Alasdair & Venables, Anthony J., 1991. "Economic integration and market access," European Economic Review, Elsevier, vol. 35(2-3), pages 388-395, April.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Goldberg, P.K. & Verboven, F.L., 1999. "The Evolution of Price Discrimination in the European Car Market," Other publications TiSEM 78ee9b01-2794-4a7b-9147-a, Tilburg University, School of Economics and Management.
    2. Pinelopi Koujianou Goldberg & Michael M. Knetter, 1997. "Goods Prices and Exchange Rates: What Have We Learned?," Journal of Economic Literature, American Economic Association, vol. 35(3), pages 1243-1272, September.
    3. Rebecca Hellerstein, 2005. "A Decomposition of the Sources of Incomplete Cross-Border Transmission," 2005 Meeting Papers 805, Society for Economic Dynamics.
    4. Goldberg, Pinelopi Koujianou & Knetter, Michael M., 1999. "Measuring the intensity of competition in export markets," Journal of International Economics, Elsevier, vol. 47(1), pages 27-60, February.
    5. Hellerstein, Rebecca & Villas-Boas, Sofia Berto, 2006. "Arm's-Length Transactions as a Source of Incomplete Cross-Border Transmission: the Case of Autos," CUDARE Working Papers 7196, University of California, Berkeley, Department of Agricultural and Resource Economics.
    6. Céline Bonnet & Pierre Dubois, 2010. "Inference on vertical contracts between manufacturers and retailers allowing for nonlinear pricing and resale price maintenance," RAND Journal of Economics, RAND Corporation, vol. 41(1), pages 139-164, March.
    7. Richards, Timothy J. & Hamilton, Stephen F. & Patterson, Paul M., 2010. "Spatial Competition and Private Labels," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 35(2), pages 1-26, August.
    8. Leheyda, Nina, 2008. "Market Power, Multimarket Contact and Pricing: Some Evidence from the US Automobile Market," ZEW Discussion Papers 08-118, ZEW - Leibniz Centre for European Economic Research.
    9. Feuerstein Switgard, 2002. "Home Bias, internationale Preisdifferenzierung und Wirtschaftsintegration / Home Bias, International Price Discrimination and Economic Integration," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 222(1), pages 112-131, February.
    10. Jeffrey Frankel & David Parsley & Shang-Jin Wei, 2012. "Slow Pass-through Around the World: A New Import for Developing Countries?," Open Economies Review, Springer, vol. 23(2), pages 213-251, April.
    11. Ralph Siebert, 2002. "Learning by Doing and Multiproduction Effects over the Life Cycle: Evidence from the Semiconductor Industry," CIG Working Papers FS IV 02-23, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
    12. Manez, J.A. & Waterson, M., 2001. "Multiproduct Firms and Product Differentiation: a Survey," The Warwick Economics Research Paper Series (TWERPS) 594, University of Warwick, Department of Economics.
    13. Cheung, Yin-Wong & Chinn, Menzie & Fujii, Eiji, 2001. "Market Structure and the Persistence of Sectoral Real Exchange Rates," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 6(2), pages 95-114, April.
    14. Hellerstein, Rebecca, 2008. "Who bears the cost of a change in the exchange rate? Pass-through accounting for the case of beer," Journal of International Economics, Elsevier, vol. 76(1), pages 14-32, September.
    15. Corsetti, Giancarlo & Dedola, Luca, 2002. "Macroeconomics of international price discrimination," Working Paper Series 176, European Central Bank.
    16. Pinelopi Koujianou Goldberg & Rebecca Hellerstein, 2006. "A Framework for Identifying the Sources of Local-Currency Price Stability with an Empirical Application," 2006 Meeting Papers 625, Society for Economic Dynamics.
    17. Gross, Dominique M. & Schmitt, Nicolas, 2000. "Exchange rate pass-through and dynamic oligopoly: an empirical investigation," Journal of International Economics, Elsevier, vol. 52(1), pages 89-112, October.
    18. Belleflamme,Paul & Peitz,Martin, 2015. "Industrial Organization," Cambridge Books, Cambridge University Press, number 9781107069978.
    19. Devereux, Michael B. & Engel, Charles & Storgaard, Peter E., 2004. "Endogenous exchange rate pass-through when nominal prices are set in advance," Journal of International Economics, Elsevier, vol. 63(2), pages 263-291, July.
    20. Douglas Nelson, 1996. "The Political Economy of U.S. Automobile Protection," NBER Chapters, in: The Political Economy of American Trade Policy, pages 133-196, National Bureau of Economic Research, Inc.

    More about this item

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F15 - International Economics - - Trade - - - Economic Integration
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

    Lists

    This item is featured on the following reading lists, Wikipedia, or ReplicationWiki pages:
    1. The Evolution of Price Dispersion in the European Car Market (REStud 2001) in ReplicationWiki

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:oup:restud:v:68:y:2001:i:4:p:811-848.. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Oxford University Press (email available below). General contact details of provider: https://academic.oup.com/restud .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.