Working Paper: CEPR ID: DP2029
Authors: 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, two main facts concerning car prices in Europe are demonstrated: (1) the existence of significant differences in quality adjusted prices across countries, with Italy and the United Kingdom 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 multi-product oligopoly model with product differentiation. The model identifies three potential sources for the international price differences: price elasticities generating differences in mark-ups; costs; and import quota constraints. Based on the results we conjecture that 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.
Keywords: price dispersion; European car market; oligopoly; incomplete rate passthrough
JEL Codes: F12; F15; L1; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| exchange rate fluctuations (F31) | year-to-year volatility in car prices (E32) |
| incomplete response of local currency prices to exchange rate fluctuations (F31) | year-to-year volatility in car prices (E32) |
| local price stability (P22) | local components in marginal costs or markup adjustments (D40) |
| exchange rate volatility (F31) | local price stability (P22) |
| price elasticities, costs, and import quota constraints (F14) | international price differences (F16) |
| domestic brand bias in Italy (L66) | higher markups (D49) |
| European Monetary Union (EMU) (F36) | year-to-year volatility (E32) |
| European Monetary Union (EMU) (F36) | cross-country price differences (P22) |