Price Transparency is driven by four rapidly developing pressures:
- The move to a single currency – the Euro – in 12 countries in Europe
- The growth of eCommerce
- The increasing effectiveness of competition policy at both EU and national level, for example VW-Audi
- The completion of the Single Market by liberalising and privatising telecommunications and energy companies
Differences in Euroland
Prices in Euroland remain surprisingly varied. As chart 1 shows, there is a spread of 20 percentage points in the overall pricing between member states, Spain being overall the cheapest.
(Source: European Commission)
It is sometimes argued that differences on small items of fast moving consumer goods are not serious because consumers are unlikely to travel internationally just to buy a tube of toothpaste. This ignores, however, the fact large numbers of people in Europe who live within easy drive of a frontier and, even more importantly, the actions of ‘parallel trade’ wholesalers who tend to even out price differences. Thus courier company UPS reports that they are shipping containers of toothpaste from Germany to Sweden because of the price difference. Similarly, parallel traders out of southern Germany supply many consumer goods in northern Italy.
Differences in indirect taxes (VAT and other indirect taxes) explain to some degree these prices gaps, certainly for cars, in the Eurozone. The remaining part of these price gaps is caused by the price discrimination by manufactures.
In the UK, price reductions resulting from the pressures of transparency are doubly interesting, as they show that sterling currency does not insulate UK businesses from its effects.
The introduction of Ecommerce permits instant price comparison across frontiers. This is particularly significant for ‘big ticket’ items and financial services products Differences in the price of ‘big ticket’ items – cars for consumers and capital goods for commerce.
Car Prices
The European common currency, the Euro, has not lessened the disparity between car prices in the European Union member countries.
Consumers continue to pay more in the UK, Germany and Austria while prices are lower in Spain, Greece, Finland and Demark, says a recent survey by the European Commission.
One of the largest difference in pricing was for a Fiat Seicento which cost €4,893 in Spain but was 63% more expensive at £7,975 in the UK.
‘Should we reduce our prices, we promise to refund you the difference’, said the Ford Motor company, in its 1999 advertisements. What led them to make this claim and why did they need to announce it as a major advertising campaign? It was one of the most dramatic recent signs of the pressures of price transparency. It proved prescient, because since the autumn of 2000 all major car manufacturers have had to reduce their prices in the UK substantially. They had a long way to go, since at the time of the Ford advert, UK prices were as much as 40% above the EU average as table 1 shows.
Table 1 - RPI for most and least expensive models of car across Europe – 1st November 1999
Index 100 = average in Euro currency countries
(Source: European Commission)
Car Price variation by country in 2004
Ranked by retail price index
Index 100 = average in Euro currency countries
(Source: Eurocarprice.com)
Among the Euro currency countries, the largest increases in manufacturers' pre-tax prices compared to 12 months ago occurred in Spain (1.9%) and France (1.7%), Germany (0.4%) and Belgium (0.8%) had the lowest annual rates of increase in the Euro zone. In the non-Euro currency countries, manufacturers' average prices in Britain were 2.0% higher than the previous year. Among the Euro currency countries, Greece has the lowest average prices, at 14% below the Euro zone average. Next lowest is Finland, where pre-tax prices are 11% below average.
Affects of price transparency
Price transparency affects both retailers and manufacturers. For retailers, it means customers will have a much better sense of a product’s whole sale costs. That’s already changing the way car dealerships operate. Car buyers routinely enter the showroom armed with the detailed breakdowns of wholesale auto prices that have been downloaded for free from any of a dozen Web sites. For manufacturers, price transparency means consumers will be better able to infer a product’s manufacturing costs, making it much harder to impose large price premiums.
As price transparency increases, so will the problems it causes for companies. These problems usually take three forms.
First, cost transparency severely impairs a seller’s ability to obtain high margins, e.g. British Airways. Secondly, cost transparency weakens customer loyalty to brands, e.g Procter and Gamble. Thirdly, price transparency can damage companies’ reputations by creating perceptions of price unfairness. When costs become clearer, consumers may come to believe that sellers of their favourite brands have been artificially increasing the retail price to give the company greater profits. This perception often leads to enduring distrust, and companies can find it difficult to win back their old customers.
Conclusion
In general, price transparency gives scope for arbitrage to break down price discrimination within the European Union. The extent to which this occurs will depend on the nature of the product in question, the organisation of the industry, and the nature of vertical linkages between buyers and sellers.
Price Transparency is driven by four rapidly developing pressures: The move to a single currency, the growth of eCommerce, the increasing effectiveness of competition policy at both EU and national level, for example VW-Audi, the completion of the Single Market by liberalising and privatising telecommunications and energy companies.
Since the introduction of the Euro, prices have changed around Europe, although prices in the Euro currency countries remain surprisingly varied. It is sometimes argued that differences on small items of fast moving consumer goods are not serious because consumers are unlikely to travel internationally just to buy a tube of toothpaste for example. Differences in indirect taxes (VAT and other indirect taxes) explain to some degree these prices gaps, certainly for cars, in the Eurozone. The remaining part of these price gaps is caused by the price discrimination by manufactures. In the UK, price reductions resulting from the pressures of transparency are doubly interesting, as they show that sterling currency does not insulate UK businesses from its effects.
Price transparency affects both retailers and manufacturers. For retailers, it means customers will have a much better sense of a product’s whole sale costs. For manufacturers, price transparency means consumers will be better able to infer a product’s manufacturing costs, making it much harder to impose large price premiums.
Referencing
Books
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Brooks I, Weatherspoon J, (2000), Business Environment, 2nd Edition, London, FT Prentice Hall
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Kotler P et al, (2000), Principles of Marketing, Third Edition, London, FT Prentice Hall
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Solomon M et al, (2002), Consumer Behaviour – A European Perspective, Second Edition, Harlow Essex, FT Prentice Hall
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Articles, journals, etc
Threlfall M, (May 2003) Journal of European Social Policy, Volume 13, Pages 121-139
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For the attention of Peter Kokle Price Transparency Presentation By Ben French
