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1 econstor Make Your Publications Visible. A Service of Wirtschaft Centre zbwleibniz-informationszentrum Economics Goldberg, PinelopiKoujianou; Verboven, Frank Working Paper The evolution of price discrimination in the European car market WZB Discussion Paper, No. FS IV Provided in Cooperation with: WZB Berlin Social Science Center Suggested Citation: Goldberg, PinelopiKoujianou; Verboven, Frank (1999) : The evolution of price discrimination in the European car market, WZB Discussion Paper, No. FS IV 99-14, Wissenschaftszentrum Berlin für Sozialforschung (WZB), Berlin This Version is available at: Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may be saved and copied for your personal and scholarly purposes. You are not to copy documents for public or commercial purposes, to exhibit the documents publicly, to make them publicly available on the internet, or to distribute or otherwise use the documents in public. If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence.

2 discussion papers FS IV The Evolution of Price Discrimination in the European Car Market Pinelopi Koujianou Goldberg* Frank Verboven** * Princeton University and NBER ** University of Antwerp and CEPR October 1999 ISSN Nr Forschungsschwerpunkt Marktprozeß und Unternehmensentwicklung Research Area Market Processes and Corporate Development

3 Zitierweise/Citation: Pinelopi Koujianou Goldberg, Frank Verboven, The Evolution of Price Discrimination in the European Car Market, Discussion Paper FS IV 99-14, Wissenschaftszentrum Berlin, Wissenschaftszentrum Berlin für Sozialforschung ggmbh, Reichpietschufer 50, Berlin, Tel. (030)

4 ABSTRACT The Evolution of Price Discrimination in the European Car Market Pinelopi Koujianou Goldberg, Frank Verboven * 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 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. * We gratefully acknowledge funding from a National Science Foundation Grant to the NBER (Grant SBR ), an Alfred P. Sloan Foundation Research Fellowship to Goldberg, and a grant by the Belgian Science Foundation (Fonds Wetenschappelijk Onderzoek, /8/F01/6260/131200) to Verboven. We also thank the Center for Economic Research (Tilburg University) for providing financial and organizational support in collecting the data.

5 ZUSAMMENFASSUNG Die Entwicklung der Preisdiskriminierung im europäischen Automobilmarkt Die Autopreise in Europa sind durch große und beständige Unterschiede zwischen Ländern gekennzeichnet. Ziel dieses Beitrages ist es, diese Preisstreuung zu erklären. Anhand eines Paneldatensatzes für den Zeitraum von 1980 bis 1993 wird erstens aufgezeigt, daß signifikante Unterschiede in qualitätsangepaßten Peisen zwischen den Ländern bestehen, wobei Italien und Großbritannien die teuersten Märkte aufweisen. Zweitens lassen sich beträchtliche Schwankungen von Jahr zu Jahr feststellen, die vor allem auf Wechselkursveränderungen und unvollständige Reaktionen bei der lokalen Preissetzung zurückzuführen sind. Diese Sachverhalte werden im Rahmen eines Mehrprodukt-Oligopol-Modells mit Produktdifferenzierung analysiert. Das Modell identifiziert drei potentielle Quellen für internationale Preisunterschiede: Preiselastizitäten, die unterschiedliche Gewinnspannen erzeugen, Kosten- und Importquotenbeschränkungen. Inwieweit diese Ursachen im einzelnen zutreffen, wird für die verschiedenen Länder ausführlich erörtert. Insgesamt lassen die Ergebnisse darauf schließen, daß sich im Gefolge der europäischen Währungsunion die von Jahr zu Jahr zu beobachtenden Schwankungen der Automobilpreise verringern dürften; sie verdeutlichen aber auch, daß ohne weitere Maßnahmen in Richtung europäische Integration die existierenden Preisunterschiede zwischen den einzelnen Ländern nicht vollständig verschwinden werden.

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14 L? hi?ii_ ih. bbd #t hm L? ti*iu L} i i T*U UL?_ hiht tl*_?l hit hu UL?t4ihtc L? ih L Mii? @_ih 3i L t_i ih ihh UL4Ti?} #itt i UL?_ L?tc ihi Mi * *i 4TLh iht UL??i ih Ui Lu 4Ti_?} L ulhi}? At t i_i? uhl4 i hiui? bbh UL?U i_ ulh T?} Thitthi L? W L ti** W Ut L4iht Mii? iti Mii? }L?} L? ulh i? Ai)?L*i_ t L Df L ih *Ui?titc 2 *Ui?tit igiu i*) Ai UL?U f2 4**L?,N?i f TihUi? Lu ThLu tc i iih tti_ M) L44ttL? t?}*i i Lu h} ti L? i Ti* h_ L Mi ii? UL? hit Lu L44? Mii? M) i t)t i4 hi}t L? W? U*i D Lu i ) Lu +L4ic U 4i4Mih it ThL iu i 4TLh t uhl4 L ih 4i4Mih itc i t)t i4 i igiu Lu *4?} Lu ulhi}?c i hit hu L?t L? 4TLh t uhl4 h_ UL? hitc? @i *L?} i t i_? UL? hit Lh @?_ i Nk Aiti hit hu i ulh4 Lu 4TLh Lh i TLh hit t Ai ThLM*i4 tc Lu 4TLh t uhl4 L UL? hit hit hu L?t Ai hi^hi4i? hi}t L? hitl*it t ThLM*i4c t?ui UL? hl* UhLttMLh_ih Lu W? ulh ihi i t } Lu UL*_ Mi _hiu *) 4TLh i_ uhl4 Ai Lu @ UL*_ Mi hi}t ihi_? uhl4 L UL? *4 i_ L 2fff Et*} *) L?i TihUi? Lu i W `i? ihi bb UL44L? 4TLh L*ic i hi^hi4i? hi}t L? UL??i_ Thi i t 6Lh Mi ii? R4L? RThLiU L?t Lu i UL? hit? ThiLt*) i t i_ bbec i_i?ui L? t Ai Mit i_i?ui ulh i L UhLttMLh_ih L44? ) b

15 t }i? M) i _i Lu 4TLh tc i }LL_t 4TLh i_ Lh3i_ hiti**iht i i_i?ui UL**iU i_ thi)t 4TLh Mii? ^ i *L? UL? hit Lu Lh t _) Ai) _L?L UL?t i hii TihUi? Lu i UL? L?i TihUi? ii? 4Lhi }i? i ih) UhLttUL? h) ThUi T*L i_? i? hl_u L? ih t hl?} i_i?ui L? hit hu L?t? L44? ) t }i? M) i Aiti _gih @UhLtt UL? hit W? Th?UT*ic t UL*_ Mi _i L it Ai U*Lti ULhhitTL?_i?Ui L i Liihc t}}it UL? Mii? ih) tuuittu*? Thii??}? Lu 4L_i*t(? UL? Lh i TLh hit L?*) t*} *) i Uii_t ^L Thiti? t i Lu R_L4it U h4tc ic i Lu ThL_Ui L4it W? 5 E i}il i L MiUL4i i t?}*i _L4it U i tii? +L4iL? E?U*_?} _c L?c ihi t ThL_U L? M) N5 t Lu L Lht EL??} 6Lh_ W? i N? i_ k?}_l4c t? +Lih EhiUi? M) ` L*_ ihi ThL_U L? M) N5 t Lu L i_? i i i} it W? i*}4c ihi t ThL_U L? M) 6Lh_ E i *?i _i4l?t _L4it U *Lih W i N? i_ k?}_l4 UL? hit Ei UiT i*}4c i Lu _L4it U h4t t Ui i Lih i i i N? i_ k?}_l4 ihi ih) t hl?} Thiti?Ui Lu _L4it U h4t i L UL?t4T L? ih?t t i4 uhl4 it ETLttM*)?U*_?} _gihi?uit? i t3it Lu Lh!tc Lh Mi i hit* Lu 6ht 5i ti UL?t hu i_ L ThUi hii _4i? f

16 tl?tg E hl_u tg i*) Df 4L_i*t? Lh 6Lh 4L_i* i L? L? *t iht Ut Lu i ttiu L? Aiti?U*_i hm it ELhtiTLihc c _4i?tL?t Ei} c *i?} c _ c Eui* UL?t4T *ii*t Lu ttii_c L? 4ic 44 ttii_( i) uhl4 TM*U*) tlhuit E2 A4iG h i i?_t uhl4 bhf bb tg i t? Lh i N? i_ k?}_l4 Aiti UL? hit ttiu h4 ulh i t3i Lu uhl4 effcfff? t Tih i*}4 4**L? i _i}hii Lu 4TLh Ti?i L? uhl4 ffi? i*}4( i Ti?i uhl4 I? L 2fI? uhl4 ei? L I? i @?_ 2DI i UL?Ui? L??_i uhl4 DI? L SI? i*}4 L?c Lh UL? L? L? i ThL_U L? L? Lu 4L_i* EtLhUiG i4mih L? it( @?_ 44 _tul? t ulh ti*iu i_ EtLhUiG,N hitlh ihit M),+c L44 ii ulh L htti*t( i it EtLhUiG W65 t it EtLhUiG 4i? L?i_? i ull?l _t hm L?? EtLhUiG!?tL?c bb. 5L4i t ThL_i_? 2 ) _t i_ hui #gihi?uit AL?it i i ih i ThUi _ttihtl? _LU4i? i_? 6}hi t Lh t)t Uc i M) UL?t hu?} i_l?u ThUi?_Uit ulh @?_ Lh Aiti?_Uit UL? hl* ulh ) M) i LMtihi_ iht Ut Ai i_l?u ThUi L? i it i tg,?er.l 6 ' 6 n 6 n w S n w s n w r n w 6 n " 6 E 46 Sulfh dqg fkdudfwhulvwlfv gdwd duh dydlodeoh iurp uhwdlo fdwdorjxhv/ l1h1/ Gh Dxwrjlgv/ Dxwr Prwr Uhyxh/ Mrxuqdo gh o*dxwrpreloh/ Ndwdorj ghu Dxwrprelo Uhyxh/ Dgdf Dxwr Vshfldo/ Zkdw FduB/ dqg Txdwwuruxrwh1 Vdohv gdwd duh wkh qxpehu ri qdwlrqdo uhjlvwudwlrqv/ dqg frph iurp Qlhxzh wrw khw Dxwryhunhhu Wrhjhodwhq Yrhuwxljhq/ o* Dujxv gh o*dxwrpreloh hw ghv Orfrprwlrqv/ Dxwrprelo Uhyxh/ PYULV/ Qrw}ldulr Vwdwlvwlfd/ Wdwvdfkhq xqg ]dkohq dxv ghu Nudiwvyhunhkuvzluwvfkdiw/ dqg Zruog Prwru Yhklfoh Gdwd1 Wkhvh sxeolfdwlrqv duh dydlodeoh dw wkh oleudulhv ri IHELDF +Euxvvhov, dqg FFID +Sdulv,1

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