The Evolution of Price Dispersion in the European Car Market

62 Pages Posted: 8 Dec 1998 Last revised: 20 Aug 2022

See all articles by Pinelopi Goldberg

Pinelopi Goldberg

Yale University - Department of Economics; National Bureau of Economic Research (NBER); Yale University - Cowles Foundation; Peterson Institute for International Economics; Bureau for Research and Economic Analysis of Development (BREAD); Centre for Economic Policy Research (CEPR)

Frank Verboven

Catholic University of Leuven (KUL) - Department of Applied Economics; Centre for Economic Policy Research (CEPR)

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Date Written: November 1998

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.

Suggested Citation

Goldberg, Pinelopi (Penny) and Verboven, Frank, The Evolution of Price Dispersion in the European Car Market (November 1998). NBER Working Paper No. w6818, Available at SSRN: https://ssrn.com/abstract=141123

Pinelopi (Penny) Goldberg (Contact Author)

Yale University - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Yale University - Cowles Foundation

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Peterson Institute for International Economics ( email )

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Bureau for Research and Economic Analysis of Development (BREAD) ( email )

Duke University
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Centre for Economic Policy Research (CEPR) ( email )

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Frank Verboven

Catholic University of Leuven (KUL) - Department of Applied Economics ( email )

Leuven, B-3000
Belgium
+32 1 632 6944 (Phone)
+32 1 632 6732 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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