Price Discrimination
in the European car market*
Victor Ginsburgh
Université Libre de Bruxelles and CORE
June 1996
Revised May 1997
Published in Cahiers du CERO 36 (1994), 153-181.
1. Introduction and outline
Differences in car prices across EC countries have been discussed in Europe for many
years. These differences are (probably) generated by the fact that the European automobile
industry is exempted from complying with Article 85 of the Common Market Treaty. This
article stipulates that a buyer can buy wherever he wants (at least within the EC) and a
seller cannnot refuse to sell. The exemption has led the car industry to sign exclusive
dealership contracts with dealers in the EC: New cars of a specific producer A can only be
sold by an authorized dealer and a dealer who sells cars produced by A is (in general) not
allowed to sell cars produced by B. This has opened the door to many misuses and
abuses, leading to a large number of lawsuits in the European (and local) court(s). The
exemption has often been criticized by the European Bureau of Consumer Unions
(BEUC), but is of course strongly supported by the European car industry. The basic idea
of "1992" and the "Big Market" was to ban tariff as well as nontariff barriers generated by
such exemptions (and other distortions), allow arbitrage and thus eliminate the opportunity
producers had to price-discriminate. But the car industry still benefits from an exemption
from Art. 85.
There was anarchy before 1985, as the few following cases illustrate. In 1974,
General Motors Continental (Belgium) loses a court case,1 for charging too high fees to
get GM cars bought outside Belgium, agreed in Belgium. A few years later, British
Leyland (United Kingdom) loses a case2 for the very same reasons. Ford Werke AG
* Many of the results discussed in this paper result from collaborations with Simon Anderson, Yves
Mertens, Geneviève Vanhamme and Shlomo Weber. My debt to them is obvious. I am also grateful to
Patrick Deplus and Michel Lambert for research assistance. Comments from Claire Friedland and
participants in a workshop given at the University of Chicago are gratefully acknowledged.
1 Ruking of December 19, 1974 (IV/28 851), See Official Journal L 29/14.
2 Ruling of July 2, 1984 (IV/30 615), See Official Journal L 207/11.
1
(Germany) loses a case3 for having circulated a memo to all its dealers announcing that it
would stop supplying cars with right-hand drives in Continental Europe (these cars were
bought by Britons, since they were cheaper than in the UK).
In 1985, the European Commission issues a set of regulations4 that allow
producers to develop networks of exclusive dealers, with exclusive territories (dealers are
not allowed to advertise out of their territory, but consumers can buy where they want).
The regulation was supposed to be removed in 1995. Its main concern was to clarify the
EC position on intra-EC sales. Basically, it ruled that no EC producer (or dealer) can
refuse to sell a car with specifications for another EC country. However, article 3 also
mentions that dealers are allowed to sell to other dealers only if these belong to the
network. Go-between firms are however allowed to buy if they come as trustees, with
written orders from specific individual consumers.
Producers and dealers did breach these new rules. The best known case is Eco
System v. Peugeot (which lasted from 1989 to 1994). Eco System is a French firm which
imported French cars from Belgium. On April 19, 1989, the firm files a complaint against
Peugeot for having circulated a memo asking its dealers to restrain from selling cars to
Eco System. Peugeot loses the case,5 but appeals to the European Court whose
judgement6 includes the following provisions: Eco System is allowed to import on order
from specific consumers (as suggested in the 1985 set of rules), but sales by PeugeotBelgium to Eco System-like firms can be limited to 10% of their total sales.
There are also other signs that the rules are not followed. In 1992, the European
Commission writes7 to all European producers, asking them (among others) to inform
their dealers that all cars should be sold at the same price, without taking into account the
citizenship of the buyer, and within reasonable delays; revised price lists should be
published every three months. A British member of the European Parliament complains
that British consumers cannot buy right-hand driven cars outside of the UK.8 Another
British MP raises a question concerning large price differences across European
countries.9 The British Consumers' Association10 claims that only 2 out of 21 dealers
contacted in Spain and Portugal agreed to cut to one month the delay between order and
effective sale of a car to British consumers; all others had much longer waiting times.
3 Ruling of August 18, 1982 (IV/30 696), See Official Journal L 256/20.
4 Draft regulation 123/85 on the application of Article 85 of the Treaty to certain categories of motor
vehicle distribution and servicing agreements, Official Journal L15/85)
5 Automobile Peugeot S.A. et Peugeot S.A. contre Commission des Communautés Européennes, Affaire
T-23/90.
6 Case C-322/93, June 16, 1994.
7 EC Press Release IP(92)441, May 27, 1992.
8 Official Journal, C162, June 29, 1992.
9 Official Journal C309, Nov. 26, 1992.
10 See Which, February 1994.
2
German dealers would take six months to supply a car, and would refuse to service cars
(still under warranty) bought in another country.
In 1995, the very year in which the 1985 rules were supposed to be removed,
Italian Renault dealers are threatened by Renault's headquarters, following complaints by
French dealers from south of France who fear the Italian competition. Danish dealers
refuse to mail their price lists to a Belgian consumer. Danish dealers, again, refuse to sell
cars to German customers, because (according to them) producers would stop supplying
them.11 Some dealers accept to sell, but charge 10 to 40% more than what a Danish
consumer would pay (excluding VAT12).
The European car market is thus far from being transparent and does not seem to
comply with nondiscriminatory rules that are supposed to prevail within the EC. The
purpose of this paper is to highlight some aspects of these discriminatory practices. In
Section 2, we estimate price differences (using a technique described in Appendix 1) and
show that these have persisted at least until 1990 (our last year of observation), in spite of
the steps taken by the European Commission to reduce or eliminate them. We also show
that producers use product lines to price-discriminate and give a theoretical model that
underpins the stylized facts. Section 3 is devoted to welfare aspects of price
discrimination. We first examine a proposal made by the Commission to set bounds on
price differences across countries and show that such bounds may be (EC-)welfare
deteriorating, especially if there are non-EC producers present on EC markets. Therefore,
it seems better and simpler to make arbitrage easier. However, we also construct a model
which points to situations in which increasing existing arbitrage costs may be welfare
improving. Finally, we briefly discuss the possible welfare effects of producers increasing
their control over dealers, in the light of what is known on the theory of vertical control
and vertical restraints. Vertical mergers may indeed turn out to be a possible reaction of
the car industry to abolishing (but this is doubtful, given the powerful producer lobby) the
block exemption to Article 85. Section 4 draws some conclusions.
2. Price discrimination in the European car industry
2.1 A first view on discrimination 13
11 SeeOfficial Journal, C42, Feb. 20, 1995.
12 The reason for which producer prices are so low in Denmark is the very high VAT rate for cars.
13 This part is based on Ginsburgh and Vanhamme (1989) and Mertens and Ginsburgh (1985). See also
Gual (1987) and Kirman and Schueller (1988) for comparable results.
3
We study price discrimination in five EC countries: Belgium, France, Germany, Italy and
the United Kingdom. These countries represent a large spectrum on several accounts, as is
illustrated in Table 1.
Table 1
Characteristics of various European car markets
______________________________________________________________________
Belgium
France
Germany
Italy
U. Kingdom
______________________________________________________________________
Dimension of the markets (new car sales in 1,000)
1989
461
2,274
2,831
2,362
2,300
61.9
69.8
57.8
29.5
2.9
2.9
2.8
9.8
15.0
15.1
0.1
0.5
1.4
11.0
11.1
11.3
Market share of domestic producers (%)
1989
a
Japanese penetration ratio (%)
1982
1986
1989
21.5
20.8
19.5
Concentration ratios (producers' shares in each country's market %)
C1 (top firm)
C4 (top 4)
C7 (top 7)
16.5
52.7
73.8
32.8
78.3
92.2
28.3
63.6
78.8
57.6
84.8
95.1
26.5
63.8
79.7
25-33
28
14
19-38
24
VAT rates (%)
1989
______________________________________________________________________
a There is no domestic producer in Belgium.
The dimensions of the markets, the shares of domestic producers, Japanese
penetration rates and concentration ratios are quite different. Except for Germany, VAT
rates are all in the order of 25%. There are reasons to expect that there is more competition
in Belgium (there is no local Belgian producer and therefore no protection; Japanese
penetration is high) and less competition in the UK, since a large share of the automobile
fleet is owned by firms (that partly pay their employees by "lending" cars) and there is
right-hand driving (with less arbitrage possibilities to buy in other EC countries). France,
Germany and Italy would somehow be located between Belgium and the UK on this one
dimensional axis.
For each of the years 1983 to 1990, we collected data on 100 (in 1983) and 120
(1984 to 1990) car makes, their prices and some of their technical characteristics (length,
width, type of fuel used, power, weight, engine capacity, maximum speed). Country
4
samples try to reflect various market characteristics, such as share of diesel run cars,
Japanese imports, domestic producers. Therefore, car makes differ across countries, and
direct price comparisons are impossible.
Results on discrimination are obtained in an indirect way, by running hedonic
regressions of the type discussed in Appendix 1 (equations (A.4) and (A.5)), pooling
makes and countries for each year. The hypothesis that the coefficients of technical
characteristics are not country specific (i.e. H0: αjk = αj0) is accepted. But the assumption
that the markups are not country-specific (H0: βk = β0) is strongly rejected. The results,
translated into indexes, are reproduced in Table 2. They show that price differences can be
very large, but that these differences seem to decrease over time.14
Table 2
Price differences across countries
(Indexes, Belgium = 100)
_______________________________________________________________________
Belgium
France
Germany
Italy
U. Kingdom
_______________________________________________________________________
1983
100
117
123
132
144
1984
100
113
109
124
129
1985
100
112
107
120
134
1986
100
108
105
118
111
1987
100
110
109
116
114
1988
100
102
107
115
126
1989
100
100
105
117
125
1990
100
100
104
113
122
_______________________________________________________________________
There is however the issue of exchange rates, which makes the results difficult to
interpret. Prices have converged, but this may be due to exchange rate movements rather
than to car-producer strategies: The pound and the Italian lira were devalued with respect
to other European currencies over the years. If exchange rates do the job, why should
producers have to worry?
Though our results do not cover the more recent years, it seems clear that very little
has changed since 1990. A recent report15 issued by the Commission of the EU shows
14 The results for 1983 can be found in Mertens and Ginsburgh (1985). For 1984-1987, see Ginsburgh
and Vanhamme (1989). Appendix 2 gives an example of the regression results for 1988-1990.
15 Car prices within the European Union on 1 November 1995, Commission of the European
Communities, Directorate General IV, Report IV/9511/96bn.
5
that price differences for individual cars remain large, though both Italy and the UK have
"gained" from their devaluations.
An interesting issue (though only indirectly linked to price discrimination) is
whether domestic producers have some market power in their own country. To do this, we
introduced domestic producer dummies into our regression equations in 1983, as well as
dummies for different origins (EC countries and Japan) for the years 1984 to 1990. In
1983, domestic producers had a slight advantage. In each of the producing countries, they
were able to "overprice" their production by 3 to 9%: They seem thus to enjoy some local
power. This remains so for Italy after 1983, but tends to disappear in other countries. It
should be noted that Japanese cars are getting relatively more expensive, especially in
Italy, where there is a very severe quota on Japanese imports. This increase is due to the
well-known effect of quotas and voluntary export restraints. Appendix 3 gives a more
detailed overview of the various findings.16
We now distinguish 4 classes of cars (small, medium, family and luxury17) and
run the same type of regressions as above. In Table 3, we give the results of the
calculations in the same form as in Table 2.18 As can be seen, price differences across
countries are larger for small cars than for luxury ones: In 1990 for example, the price
difference between Belgium and the UK is 32% for small cars, 23 to 26% for medium and
family cars and only 15% for luxury cars.
This is an interesting result, which we tried to understand in the light of a model
that examines whether and how product lines can be used to implement discriminatory
policies.
2.2 Product line discrimination
Ginsburgh and Weber (1996) construct a model in which firms make a two-dimensional
product line decision. The first stage is the choice of a styling, or company practice, that
differentiates all of its products in some common way from those of its competitors. In the
second stage, each company makes a product line decision which includes the range of
products it offers, and the corresponding price schedule.
16 See Mertens and Ginsburgh (1985) and Ginsburgh and Vanhamme (1989).
17 The four classes are defined as follows:
length (cm)
eng. cap.(cc)
small
less than 400
1000-1600
medium
approx. 400
1300-2000
family
approx. 420
1600-2000
luxury
approx. 450
over 2000
18 The details of the regressions can be found in Appendix 4.
6
Table 3
Price differences for various classes of cars
(Indexes, Belgium = 100)
_______________________________________________________________________
Belgium
France
Germany
Italy
U. Kingdom
_______________________________________________________________________
1988
Small (162)
Medium (164)
Family (142)
Luxury (132)
100
100
100
100
107
102
95
105
113
112
106
101
118
119
112
108
137
127
128
118
100
100
100
100
102
100
97
101
111
110
109
99
117
120
117
110
128
130
128
121
100
100
100
100
103
99
100
101
109
108
109
97
116
115
110
107
132
123
126
115
1989
Small (163)
Medium (162)
Family (141)
Luxury (134)
1990
Small (157)
Medium (157)
Family (148)
Luxury (138)
_______________________________________________________________________
Note. The number of makes is given in parentheses.
There is a market with differentiated products and n firms, competing with product
lines: There are observable characteristics, common to all products of a given firm, like the
Mercedes or BMW "look." Firms locate symmetrically on the circle at locations s1, s2, ...,
sn. While consumers may wish to buy a product of a given style, they also wish to choose
among different qualities. Firms therefore offer a range of qualities Q = [qL, qH] and firm
i's product line is defined by si x [qL, qH ]. The marginal cost of producing a good of
quality q is constant and identical for all firms: ci(q) = cq.
There is a continuum of consumers (t, m) parametrized by their most preferred
style t and income m. Each consumer purchases at price p, one unit of a commodity of
style s and quality q. For a consumer whose preferred style is t and income is m, the
choice over style s, quality q and price p is made according to the preferences represented
by the utility function:
U(s,q,p) = - |t - s| + q(m-p)
where |t - s| is the distance between his most preferred style t and the style s he eventually
purchases (the disutility of not being able to buy exactly what he wants). The second term
q(m-p) represents the utility from consuming one unit of a good of quality q for which he
7
pays p; (m - p), his income after the purchase is weighted by the quality purchased. This is
a common form of utility function when there is product differentiation. It ensures that
individuals with higher income put more weight on quality.
Firms are not able to observe the characteristics of individual consumers and must,
therefore, choose their prices as a function of quality only. For reasons of technical
tractability, we assume that price is a linear function of quality P(q) = ai + biq. Each firm
chooses parameters (ai, bi) to maximize its profits.
The following three propositions can be derived:
Proposition 1. If the number of firms and the range of consumers' incomes is large
enough, there will exist a unique (symmetric) Nash equilibrium.◊◊
Proposition 2. Under perfect competition (i.e. when the number of firms is very large),
the price schedules P(q) = ai + biq are such that ai = 0 and bi = c.◊◊
This simply means that under perfect competition, as expected, each firm charges
its marginal cost for a product of quality q: P(q) = cq.
Proposition 3. Consider the pricing schedule ai + biq of firm i. If the number of firms
increases, ai decreases and bi increases.◊◊
P(q)
2
1
cq
q
Figure 1 Price schedules in the case
of product line discrimination
Propositions 2 and 3 combined show that increasing competition generates a
decline of the fixed part (intercept) of the price schedule (with 0 as a limit) and an increase
of the variable part (slope) of the schedule (with c, the marginal cost, as a limit). It is
important to notice that the markup of prices on costs is thus not constant and that product
8
lines are used as a discriminating device. Figure 1 illustrates the result of Propositions 2
and 3 for two different levels of competition in two situations (countries) 1 and 2 with n1 >
n2, where nk is the number of firms in each situation.
We have tried to verify the conclusions of Proposition 3 for the European car
market. We collected prices for as many makes as possible in five EC countries (B, F, G, I
and UK) for 1988, 1989 and 1990 and grouped them by producer. We then ran
regressions of the type mentioned in Appendix 1, eqn. (A.4):
pik,c = Σjαjk,cxijk,jc + βk,c + εik,c.
In this case however, a separate regression is run for each of the 25 producers
(subscript c), pooling observations over countries k. This makes it possible to check
whether (and which) producers discriminate and how they proceed, i.e. whether only the
intercepts βkc are different or whether producer c also uses product lines to discriminate,
reproducing the scheme represented in Figure 1. The main results, shown in Table 4, can
be summarized as follows:19
(a) for 19 producers producing gasoline-run cars, there is country-specific discrimination,
i.e. the hypothesis that intercepts are equal (H0: βkc = β0c) is rejected; the hypothesis is
also rejected for 12 diesel-run car producers (not shown here);
(b) the intercept is smallest for Belgium in 8 cases, second-smallest in 8 other cases; the
intercept is largest in the UK in 10 cases, second largest in 4 cases;
(c) in 17 cases, the null hypothesis that the slope of the engine capacity characteristic is the
same across countries (H0: α jk,c = α j0,c) is rejected; in 15 cases, the same holds for
speed;
(d) the slopes are largest for Belgium in 12 (out of the 17+15=32) cases, and secondlargest in 7 cases; they are smallest for the UK in 8 cases, second-smallest in 10 cases.
To give a more concentrated view of the results, we arbitrarily associate numbers to
the ranks (1 for largest, 2 for second-largest, etc.) and compute "average" ranks, weighted
by number of firms. The average ranking (AR) for intercepts is a follows: Belgium (37),
France (48), Germany (60), Italy (62) and the UK (78), while the average ranking for
slopes is: UK (84), Germany (84), Italy (85), France (110) and Belgium (117). The
ranking of countries based on intercepts is thus almost the inverse of the ranking based on
slopes. If the results described in Propositions 2 and 3 are applied to our case, the ranking
19 We discuss the outcome for 1990 only; the results for 1988 and 1989 are hardly different.
9
of countries from most to less competitive is: Belgium, France, Germany, Italy and the
United Kingdom. This ranking corresponds to our priors about the degree of competition
in the various countries, though it is not clear whether France is more or less competitive
than Germany.
Table 4
Product line discrimination 1990
_____________________________________________________________
Number of firms with rank
1
2
3
4
5
AR
_____________________________________________________________
1. Ranking of intercepts
Belgium
France
Germany
Italy
UK
8
4
4
2
1
8
5
2
3
1
1
7
4
4
3
0
2
5
8
4
2
1
4
2
10
37
48
60
62
78
A. Engine capacity
Belgium
France
Germany
Italy
UK
1
3
6
4
3
3
0
6
4
4
3
8
3
1
2
3
3
1
6
4
7
3
1
2
4
63
54
36
49
53
B. Speed
Belgium
France
Germany
Italy
UK
2
1
3
4
5
1
1
1
6
6
3
3
4
2
3
4
6
4
1
0
5
4
3
2
1
54
56
48
36
31
C. Engine capacity & speed
Belgium
France
Germany
Italy
UK
3
4
9
8
8
4
1
7
10
10
6
11
7
3
5
7
9
5
7
4
12
7
4
4
5
117
110
84
85
84
2. Ranking of slopes
_____________________________________________________________
AR means average ranks, i.e. ranks weighted by the no. of firms (see text).
10
3. Welfare aspects of price discrimination and arbitrage costs
A monopolist (or oligopolists) will price-discriminate if there are no (or little) arbitrage
possibilities between countries, and if price elasticities happen to be different.
We first study a proposal, introduced a few years ago by the EC, suggesting to
impose upper bounds on price differences across countries. We show that this may lead
to welfare losses: One moves from one second-best situation to another one, and this does
not, in general, ensure that the second situation Pareto-dominates the first. Obviously, one
should not enforce price equalization by constraining producers to follow rules, but allow
arbitrage to play its role and certainly not rule (as was done in many cases by the
European Court) against those consumers and firms that try to arbitrage.
Next, we develop a model in which consumers have to bear a cost when arbitraging
(a consumer living in France may buy a car in Belgium, but undergoes a certain number of
costs -- not necessarily monetary -- to have his car registered in France). We show that if
arbitrage costs exist, it may be welfare improving to increase them.
3.1 Imposing cross-border bounds on prices
In 1983, the European Commission issued a "draft regulation on the application of Article
85 of the Treaty to certain categories of motor vehicle distribution and servicing
agreements" (Official Journal (1983)). The objective was to smooth out price differences,
by introducing upper bounds on price differentials between member states. More
precisely, the Commission suggested to "punish" producers whose cross-country price
differentials would exceed 12% during six months at least, by cancelling their right to sign
exclusive dealership agreements.
An obvious advantage of this type of regulation is the ease with which it can be
implemented. It has low informational requirements and the authorities only need to know
price levels, not marginal costs, as would be the case if they tried to implement first-best
outcomes, equalizing prices and marginal costs. Note, however, that such a regulation may
be easily overruled by customizing products and make them look country-specific.
Our basic model is simple.20 We consider two producers located in two different
countries. Each of them sells on his home market and exports to the other country.
Consumers are endowed with linear demand functions for each product. To simplify
further, the two producing countries are similar and have identical demand functions for
the home product, and identical demand functions for the imported one. The two goods
sold in each market are considered as imperfect substitutes by consumers. The demand
functions in country i are:
20 See Davidson, Dewatripont, Ginsburgh and Labbé (1989).
11
qi1(p1,p2) = ai1 - bi11pi1 + bi12pi2
qi2(p1,p2) = ai2 + bi12pi1 - bi22pi2.
Producers choose prices pi1 and pi2 in each of the two markets i = 1, 2, to
maximize profits, subject to price constraints. Marginal production costs c are constant
and equal for the two producers, so that producer j chooses p1j, p2j that result from
maximizing:
p1jq1j(.) + p2jq2j(.) - c(q1j+q2j).
We consider two types of price constraints:
(a) "additive" constraints, which require prices in different markets not to differ by more
than a certain (nominal) amount:
(3.1)
| pi - pj | ≤ ε, i ≠ j
(b) "multiplicative" constraints, which require ratios of prices not to differ by more than a
certain proportion:
(3.2)
pi
pj ≤ 1+ε,
i ≠ j.
The equilibrium concept used is that of a Nash game in constrained prices. This
leads to the following outcomes, summarized in Propositions 4 to 6. The results are
obtained under strongly simplifying assumptions (linear demand curves, constant and
equal marginal costs, symmetry), but would probably become even more ambiguous under
more general assumptions.
Proposition 4. In the case of symmetric duopolistic competition in two countries, reducing
price discrimination through the imposition of additive constraints (3.1) on cross-country
prices may reduce total output (in each country) as well as social welfare (consumer
surplus+profit). The same outcome is true for multiplicative constraints (3.2) which are
uniformly worse in comparison with additive constraints.◊◊
The consequences of both multiplicative and additive constraints are ambiguous,
but they could reduce welfare. The reason for which multiplicative constraints are
12
"uniformly worse" (i.e. along the whole path from a given ε > 0 until ε = 0) is because, on
top of potential distortions due to discrimination, there is a bias toward excessively high
prices: In order to relax the pressure of the price constraint, oligopolistic producers will
have an incentive to raise prices, since this may have a significant impact on profits. As an
example of this, start from prices equal to 100 and 112. If the lower price is raised to, say,
110, the other price can go to 122 under an additive constraint, and to 123.2 under a
multiplicative constraint, a difference that can greatly affect profits. Moreover, in the case
of a monopoly (and this will be less true for oligopolists) and multiplicative constraints,
the producer has an incentive to raise prices in both countries, in order to alleviate the
burden of the constraint.
The next result deals with the (realistic) situation in which there is a third country
with no domestic producer (Belgium, in the case of the automobile industry) and where
each producer has an advantage in his home country:21
Proposition 5. In the case of symmetric duopolistic competition in three countries, with no
home producer and lowest prices in the third country, the imposition of constraints on
cross-country prices unambiguously increases prices and decreases welfare in the third
country, and has indeterminate effects on total welfare, though in countries with home
production, consumers in the home country will be better off.◊◊
This proposition shows that the distributional consequences of such price
constraints are most likely of more concern than the consequences for aggregate output or
welfare. In particular, it is clear that the small country will have little to say in favour of any
regulation directed at reducing price discrimination, unless it can be compensated.
Furthermore, since in producing countries, only consumers gain, there is political pressure
exercised by the car industry against such regulations.
So far, we have ignored outside EC competition. In the case of the car market,
Japanese competition is far from being negligible. It is obvious that even if antidiscrimination legislation is likely to improve total output and welfare, it is of interest to
the EC to keep as much as possible of the additional surplus within its borders. And, quite
evidently, even if European consumers gain, total welfare in the EC might decrease if the
legislation generates a massive transfer to non-EC producers. This is what Proposition 6
shows:
Proposition 6. In the case of non-EC producers, imposing price constraints within the EC
may decrease total welfare in the EC.◊◊
21 See Section 2 and Appendix 3, for a justification of this assumption.
13
The legislation was hotly debated for a number of years, and (fortunately enough)
never applied.
3.2 Does arbitrage always help?
In this section, we discuss a two-country model where a monopolist sells a nondifferentiated commodity. If the monopolist faces different demand curves within each
country, he will charge different prices, but consumers have a possibility to arbitrage at
some cost. The model combines, therefore, third- and second-degree price
discrimination.22
Third-degree price discrimination involves selling in different markets delineated
by exogenous characteristics at different prices. Pure third-degree discrimination may be
rather rare, since in many cases some consumers can arbitrage between markets, although
at some cost: Europeans buy their PCs in the United States for use at home; Americans
used to buy German cars in Europe, etc. The boundaries of the markets are often blurred
and firms account for the fact that consumers can cross from one market segment to
another. Since consumers in the high-price market can then choose which market to buy
in, there is self-selection among them. This introduces an element of second-degree price
discrimination and the firm will choose prices that anticipate the endogenous split of
consumers.
The analysis of pure second-degree price discrimination shows that a monopolist
may wish to create a second market in another country in which there is no local demand
for the product, in order to price discriminate across consumers in the first country. The
analysis also suggests that world welfare (and firm profit) rises as arbitrage costs fall.
We then integrate both second- and third-degree price discrimination within a
common framework by analyzing monopoly pricing across countries when arbitrage is
possible but costly and there is local demand in the second country, as well as buyers
from the first country. A simple condition for profits to rise or fall with arbitrage costs
depends on whether second- or third-degree discrimination is dominant. The analysis of
pure second- and third-degree discrimination alone suggests that world welfare would fall
with increasing arbitrage costs. In the integrated model, we find that, on the contrary, world
welfare may increase if arbitrage is made more difficult.
The intuition for this result is as follows. The potential for third-degree price
discrimination is curtailed when consumers in country CF tend to buy in country CB if the
price there is low enough. However, CB provides a channel for the monopolist to seconddegree price discriminate among consumers from CF if they can be sorted by arbitrage
costs which are correlated with willingness to pay. In our model, higher arbitrage costs
22 A detailed description of this model is given in Anderson and Ginsburgh (1996).
14
render second-degree price discrimination more effective. Hence profit rises with arbitrage
costs if the third-degree effect dominates, and falls if the second-degree effect dominates.
The welfare effects are also ambiguous. The most interesting case is when welfare
improves in both countries. This can happen when higher arbitrage costs cause a large
reduction in the number of consumers indulging in the (socially wasteful) operation of
arbitrage. If the monopolist is based in country CF from which consumers arbitrage, its
profit may rise so much as to fully offset the decrease in consumer surplus there.
Consumer surplus of residents in CB also rises (the third-degree restraint having been
relaxed), so that welfare rises in both countries. Hence the model provides an illustration
of the proposition that higher non-tariff barriers to trade may enhance the welfare of both
countries involved.
The basic framework
There are two countries, CF and CB. A monopolist, based in CF, sells its product in
both countries. Prices at which it offers its product are pF in CF and pB in CB, with pF ≥
p B . Consumer behaviour may be generated using the Mussa and Rosen (1978)
framework.23 Each consumer buys one unit of the good if buying yields positive surplus.
Let (θ, τ) denote a consumer type with willingness-to-pay θ and arbitrage cost τ. An
individual's τ can be interpreted as a direct cost of going to the other country. It can also
be the utility loss of buying the product designed for a different market and different
people value such discrepancies differently. The conditional utility of a CF-consumer of
type (θ, τ) is:
UF = θ-pF if he buys in CF,
UX = θ-pB-τ, if he buys in CB (a "crosser"),
U0 = 0 if he does not buy.
The monopolist located in CF chooses prices pB and pF to maximize its profit (constant
marginal cost is normalized to zero):
(3.3)
Π = pFF + pBB.
Let F(pB + t, pF) be the number (measure) of CF-consumers who buy in F (those for
whom UF > UX > 0) and X(pF, pB + t) be the number of CF-consumers who cross to CB
(those for whom UX > UF > 0). We assume throughout that (this assumption holds in the
Mussa-Rosen representation):
23 This is not necessary in general, as long as the function which the monopolist maximizes is strictly
concave and that assumption (3.4) that follows holds.
15
(3.4)
∂F
∂X
=
∂pB
∂pF > 0.
Third-degree discrimination with arbitrage costs
Assume that pF > pB, but that the arbitrage cost t, common for all consumers (τ =
t), is smaller than the price difference pF - pB . Then, the monopolist cannot set
unconstrained prices (since all consumers would go to CB) and has to take into account
the constraint pF ≤ pB + t. It is easy to show that:
Proposition 7. If all consumers in CF face the same arbitrage cost t, then increasing t
raises profits, raises consumer surplus in CB and reduces it in CF. Total surplus falls if
output does not rise.◊◊
The sufficient condition for surplus to fall if output does not rise follows from the
analysis by Schmalensee (1981). For a given amount of output to be allocated across two
markets, total welfare is larger the more similar are the two prices. Raising the arbitrage
cost raises the wedge between the prices and hence the willingness-to-pay of the marginal
consumer in each market. If output does not rise, welfare necessarily falls with t.
Second-degree discrimination
To isolate the effects of pure second-degree price discrimination, we assume that
there is no domestic market in CB, but that CF-citizens differ as to their arbitrage costs.
Then, the monopolist may use market CB to discriminate across CF-consumers, who will
self-select the country in which to buy. From the first-order conditions for profit
maximization (3.3) of the monopolist, one obtains:
(3.5)
∂Π
∂F
∂F
= pF∂p + F + pB∂p = 0,
∂pF
F
B
(3.6)
∂Π
∂F
∂X
=
p
+
X
+
p
= 0.
F
B
∂p
∂p
∂pB
B
B
From (3.3), using the Envelope Theorem and the fact that ∂F/∂t = ∂F/∂pB and ∂X/∂t =
∂X/∂pB (see the definitions of F(.) and X(.)), one has:
(3.7)
dΠ
∂F
∂X
dt = pF∂pB + pB∂pB.
16
Using (3.6), we obtain:
(3.8)
dΠ
= -X < 0.
dt
Similar reasoning leads to the following expression for consumer surplus:
(3.9)
dCS
dpB
dpF
dt = -X(1+ dt ) - F dt ,
and hence, for total welfare:
(3.10)
dW
dpB
dpF
dt = -X(2+ dt ) - F dt .
Therefore we have:
Proposition 8. An increase in arbitrage costs t decreases profits. Moreover, total welfare
cannot increase if dpB/dt + 2 ≥ 0 and dpF/dt ≥ 0.◊◊
These conditions are sufficient (but not necessary) for welfare to fall with t. We
expect the two conditions to hold in realistic situations: pB would fall to counteract a rise
in t, but less than the increase in t, so that dpB/dt > -1 which entails dpB/dt + 2 ≥ 0. Also, if
dpB/dt > -1, an increase in t will raise quantity demanded in CF if no action is taken on pF.
One would then expect the monopolist to increase pF to bring back quantity demanded in
CF closer to where it was, so dpF/dt ≥ 0. Therefore, the "normal" case would be a decrease
in welfare when t increases.
An integrated model with linear demands
The results in Propositions 7 and 8 hold under quite general demand formulations,
as long as they satisfy (3.4) and concavity of (3.3). For the model that integrates both
types of price discrimination, we assume that demand of consumers located in CF is
generated by the Mussa-Rosen framework, and that willingness-to-pay θ is uniformly
distributed on [0,1]. Moreover, we assume that CF-consumers have different valuations for
their transaction (arbitrage) cost:
(3.11)
τ = bθ + t, b ∈ [0,1], t > 0.
17
For example, if θ is correlated with income, rich CF -consumers are less inclined to
arbitrage since, say the time lost by buying in CB is more valuable to them than that of
poor consumers.24 Domestic demand B by consumers in CB is simply:
(3.12)
B(pB) = 1 - pB/α.
We set 0 < α < 1, so that willingness-to-pay for CB-consumers is less than that of CFconsumers. Solving the model for optimal prices leads to the following proposition:
Proposition 9. For the integrated model with linear demands, there is a set (with positive
measure) of parameters{t,b,α} such that:25
(a) there exists a solution in which all three demands F, X and B are positive, which
maximizes profits;
(b) an increase in the transaction cost t increases profits as well as total welfare even
though:
(b1) total output decreases;
(b2) dpF/dt > 0 and dpB/dt + 2 > 0.◊◊
The important issue is that (b1) and (b2) contradict the results obtained in
Propositions 7 and 8. The integrated model is thus much more intricate than what the two
parts taken separately lead one to think.
The reason for this result is that when t rises, the number of individuals who cross
from CF to CB drops, more than offsetting the higher transaction costs for those who
keep arbitraging, so aggregate transaction costs fall. Note that this last result hinges on the
fact that the common transaction cost t is strictly positive. Any
move away from t = 0
(even if b > 0) is welfare deteriorating. The result therefore does not contradict optimality
of zero transaction costs (even when the producer is a monopolist). However, casual
observation of EC car markets shows that arbitrage possibilities are hindered by a large
number of monetary (taxes) and nonmonetary (paperwork, repairshops refusing to repair
cars bought in another country, etc.) obstacles.
3.3 Welfare aspects of mergers and vertical control in the car industry
European consumer unions have often argued that contracts between producers
and dealers lead to excessive prices and thus welfare losses. The literature on this issue
24 We also impose the parameters to satisfy the technical condition that the C -consumer with highest θ
F
gets positive surplus from buying in CB when pB is zero.
25 The parameter values for which this result holds were obtained by computer simulation.
18
shows that this is not necessarily so. Contracts between a producer and retailers take one
of the following forms (Tirole (1988), p. 171):
(a) linear prices: there exists a unit price for sales by the producer to retailers;
(b) franchise fees: the retailer pays a fixed fee for the priviledge of being supplied;
(c) resale-price maintenance: the final price (or bounds on the final price) is set by the
producer;
(d) quantity fixing: the retailer is forced to buy fixed (or minimal) quantities.
There may also exist constraints on the possibilities of retailing:
(a) exclusive territories: each retailer may be given an exclusive territory, where he acts as a
local monopolist;
(b) exclusive dealing: retailers may be forced into exclusively dealing in a unique product
(line) by the producer, or allowed to deal in substitutes from several producers;
(c) tie-in sales: retailers may be forced to buy all their inputs from the same producer.
Before trying to assess what may happen after 1995 in the car market, we briefly
survey the main theoretical results. Spengler (1950) shows that under linear pricing,
vertical integration of the retailer and the producer is welfare improving and in some
simple cases, the same result is obtained by imposing franchise fees, resale-price
maintenance or quantity fixing. However, when the retail sector is competitive, vertical
integration leads to ambiguous results on welfare. Exclusive territories are welfare
deteriorating (if demand is linear and retailers are risk averse, see Rey and Stiglitz (1987)
and Rey and Tirole (1986)), but they are not allowed.
Exclusive dealing is a common form of contract between car producers and
dealers. This practice results in a loss of returns to scale, but may also lead to efficiency
gains. In general, however, it imposes costs of entry to new manufacturers, who have to set
up their own distribution networks.
Market foreclosure has been another commonly used practice by producers and
dealers who refuse to sell to foreign buyers, or refuse maintenance of cars which have
been bought in foreign countries, etc. These practices have not always been condemned by
the European Court, or only mildly so, and dealers use them time and again. Such
practices have negative effects.
Tie-in sales are the rule rather than the exception. This is natural for spare parts
(which are less and less normalized), but seems to become common also for specialized
checking and other equipement used to maintain cars.
19
By and large, vertical integration, or restraints which produce similar effects, do not
seem to have important welfare deteriorating effects. In the United States and in Europe,
franchising is legal; resale-price maintenance is illegal; exclusive territories as well as tieins are in principle illegal (in the US), but are judged according to a rule of reason. Market
foreclosure, a common practice in the EC car industry, should obviously be ruled against.
Clearly, the costs of entry of new producers is higher in the presence of exclusive
dealership. The costs of setting up a new distribution network is large if it has to provide
all the services provided by existing networks (maintenance and repair of cars). The
question is then whether it would be "fair" to let new sale networks emerge, which would
only sell, and not provide after-sale services. This is obviously the rationale for the
judgement of the European Court against the French chain-store Carrefour, which was
buying French cars in Belgium, and selling them in France, without providing any other
service. It is also the rationale in the Peugeot-Germany case (refusal to service cars bought
in a foreign country).
Obviously, not all repairshops sell cars and not all have exclusive dealership
contracts with producers. This seems to imply that servicing cars is a profit making
operation and that there is no necessity for manufacturer-tied car dealers to have been the
sellers of the cars they maintain. There is thus no reason to rule against dealers who only
sell new cars and provide no service. This would certainly provide more arbitrage
opportunities.
4. Conclusions
There are obviously large price differences within the European Community. Some of
these are clearly resulting from exemptions to article 85 of the Treaty. There was also poor
and ambiguous judgement in rulings by the European Court in several cases which
opposed the car industry to consumers or to non-authorized dealers. Moreover, since the
judgements were not always clearcut, some producers did not even comply with rules set
by the Court.
Obviously, price equalization should not be enforced by rules: It is not guaranteed
to lead to welfare increases, and may even decrease welfare (section 3.1). Allowing
arbitrage to take place is what should be done, but the example of the computer industry in
Europe shows that there is price discrimination even when arbitrage is possible: Prices are
some 20% higher in France than in the UK.26,27
26 See Baudewyns (1991).
27 Note that it is still not so easy to buy a portable computer in the UK or in Belgium and bring it to
France. The experience I made five years ago carrying my outdated and used computer (a MacIntosh Plus,
with a negative resale value, except for a collector of antiques) to France, in view to spend a few months
in a French research center, is a good example: it cost me four half-days lost in customhouses as well as
20
Do price differences within the EC really matter? In their papers, Smith and
Venables (1988), Burniaux and Waelbroeck (1992) and Mercenier (1992), model
European integration as a move from an initial equilibrium with segmented markets to an
equilibrium in which prices for tradeables are equalized. All three (computable general
equilibrium with imperfect competition) models are static, but try to simulate the long-run
effects of integrration by allowing the number of firms to adjust, while this number is kept
fixed in short-run scenarios. The results by Burniaux and Waelbroeck and Mercenier
point to relatively small welfare effects (0.5 to 1%), which are unevenly distributed across
countries. The Cecchini Report on which the move to the "Big Market" was based is much
more optimistic: The welfare gain is 2.5% in the worst case (Smith and Venables (1988)).
Barten (1994) estimates demand systems for five EC countries (Belgium, France,
Germany, Italy and the United Kingdom28) and shows that similarity of tastes is rejected,
so that there is no reason to expect relative prices to be the same. Barten then computes the
changes in minimal expenditure that would follow from a simulated equalization of relative
prices (he computes the changes in minimal expenditure in each country, if the relative
price structure was the one prevailing in each other country). The result is that the welfare
effects are minimal: "a few ECU per head."
Decreasing price discrimination may have two effects:
(a) A production and consumption reallocation effect: Inefficient production units will go
bankrupt. Sales are transferred from low-price countries (where prices will increase after
discrimination has been lowered) to high-price countries (where the reverse will occur)
and consumption is transferred from lower to higher marginal-utility consumers.
(b) An effect on total output.
The second effect seems negligible. Most of the 1992-welfare increasing effects
are likely to be due to gains in production efficiency. These are captured by the general
equilibrium approach followed by Burniaux, Mercenier, Smith, Venables and Waelbroeck.
Barten measures the gain in consumer surplus only, and this is small.
$350 in agency fees paid to a customs agent to avoid the computer being confiscated because, according to
the French customs, I had exported it "illegally," and computers were a "strategic" commodity.
28 Note that these are the same countries as those for which we have compared car prices.
21
References
Anderson, S. and V. Ginsburgh (1996), International pricing with costly consumer
arbitrage, Review of International Economics, forthcoming.
Barten, A. (1994), Measuring the welfare effects of European price convergence, in M.
Dewatripont and V. Ginsburgh, eds., The Challenge of European Integration in a
Changing World, Amsterdam: North-Holland.
Berndt, E. (1991), The Practice of Econometrics: Classic and Contemporary, Reading,
Mass.: Addison-Wesley.
Burniaux, J.-M. and J. Waelbroeck (1992), European integration and product
specialization: an assessment with a world general equilibrium model with imperfect
competition, Université Libre de Bruxelles, manuscript.
Case, B. and J. Quigley (1991), The dynamics of real estate prices, Review of Economics
and Statistics 73, 50-58.
Court, A. T. (1939), Hedonic price indexes with automotive examples, in The Dynamics of
Automobile Demand, New York: The General Motors Corporation, 99-117.
Davidson, R., M. Dewatripont, V. Ginsburgh and M. Labbé (1989), On the welfare effects
of anti-discrimination regulations in the EC car market, International Journal of
Industrial Organization 7 , 205-230.
Ginsburgh, V. and G. Vanhamme (1989), Price Differences in the EC car market: some
further results, Annales d'Economie et de Statistique 15/16, 137-149.
Ginsburgh, V. and S. Weber (1996), Product lines and price discrimination in the
European car market, CORE Discussion Paper 9607, Université Catholique de
Louvain.
Griliches, Z. (1961), Hedonic Price Indexes for Automobiles: an econometric analysis of
quality change, reprinted in Griliches (1971), 55-87.
Griliches, Z. (1971), Price Indexes and Quality Change, Harvard University Press.
Gual, J. (1987), An econometric analysis of price differentials in the EEC automobile
market, mimeo, IESE, Barcelona.
Kirman, A. and N. Schueller (1988), Price leadership and discrimination in the European
car market, mimeo.
Kravis, I. and R. Lipsey (1971), International price comparisons by regression methods, in
Griliches (1971), 150-179.
Kravis, I. , Z. Kennessey, A. Heston and R. Summers (1975), A System of International
Price Comparisons of Gross National Products and Purchasing Power, Baltimore:
The Johns Hopkins Press.
Mercenier, J. (1992), Completing the European internal market: a general equilibrium
evaluation under alternative market structure assumptions, Université de Montréal,
manuscript.
22
Mertens, Y. and V. Ginsburgh (1985), Product differentiation and price discrimination in
the European Community: the case of automobiles, Journal of Industrial Economics
35, 151-166.
Mussa, M. and S. Rosen (1978), Monopoly and optimal product quality, Journal of
Economic Theory 18, 301-317.
Rey, P. and J. Stglitz (1986), The role of exclusive territories, manuscript, paper presented
at the Econometric Society Meeting, Copenhagen, 1987.
Rey, P. and J. Tirole (1986), The logic of vertical restraints, American Economic Review
76, 921-939.
Rosen, S. (1974), Hedonic prices and implicit markets: product differentiation in pure
competition, Journal of Political Economy 82, 34-55.
Schmalensee, R. (1981), Output and welfare implications of monopolistic third-degree
price discrimination, American Economic Review 71, 242-247.
Smith, A. and A. Venables (1988), Completing the internal market in the EC: some
industry simulations, European Economic Review 32, 1501-1526.
Spengler, J. (1950), Vertical integration and anti-trust policy, Journal of Political Economy
58, 347-352.
Tirole, J. (1988), The Theory of Industrial Organization, Cambridge, Mass.: MIT Press.
23
Appendix 1 On estimating international price differences
We describe two possible estimators to check for price differences. These are
obtained from observing a set i = 1, 2, ..., N of commodities (car makes) and a set of
countries k = 0, 1, ..., K. The estimators are the (geometric29) mean and the (geometric)
hedonic estimator.
1 The geometric mean estimator
Let pik be the log of the price Pik of make i, sold in country k . We define the KN
elements yik = pik - pi0, which are the (logged) differences of prices in countries k and 0.
Here, country 0 is the reference with respect to which all prices are measured. We write
the following linear model:
(A.1)
K
pik - pi0 = ∑ δkβk + εik
k=1
In (A.1), δk is a dummy variable which takes the value one when observation i belongs to
country k and zero otherwise. The βk's are parameters to be estimated and εik is a random
disturbance with the usual properties. It is trivial to check that the OLS estimate for βk is
the (geometric) mean of price differences:
(A.2)
1
^β
k = N Σiyik.
^
Two tests can now be run. The first is H0: βk = 0 for all k; it will provide an answer to the
question whether prices between all countries, including the reference country k = 0 are
significantly different or not. The second test (which needs reparametrizing the model) is
H0: ^βk = β0: are prices in all countries (with the exclusion of k = 0) equal.
This estimator requires, however, that all car makes are sold in all countries. One
could obviously consider only those makes which are sold everywhere, but when the
comparison includes several countries, the number of identical makes sold everywhere will
turn out to be small. Moreover the few common makes will in general not be
representative of the markets in each country (Italian makes, for example, are hardly sold
in the UK). One can also think of including different makes for different countries, as
long as all are sold in a "reference country." This is a sensible alternative, since what is
actually done by computing the (pik - pi0) is reducing cars to "equal quality" cars. The
problem here is to find a reference country in which all makes are sold. Both approaches
29 We could also define arithmetic "estimators."
24
are therefore difficult to implement in practice, and one may resort to replacing the cars in
the reference country by "synthetic" cars. This is, in essence, what is done in hedonic
estimation.
2 The hedonic estimator
The hedonic estimator30 is used to "generate" cars in the reference country.
Assume that the (log of the) price of a car i can be obtained by combining the prices αj
(j = 1, 2, ..., J) of its J characteristics xij. Thus:
J
(A.3)
pi0 = ∑αjxij.
j=0
The parameters αj appearing in (A.3) are interpreted as (implicit) prices of the various
characteristics describing a car. Combining (A.1) and (A.3) leads to:
J
K
j=1
k=1
pik - ∑αjxij = ∑ δkβk + εik,
which can of course also be written as:
(A.4)
J
K
j=1
k=1
pik = ∑α jx ij + ∑ δkβk + εik.
This suggests that the parameters α j and β k in equation (A.4) can be obtained by a
regression of prices pik on characteristics xij and on dummy variables representing
countries k = 1, ..., K. Testing for price differences between countries boils down to
^
H0: βk = β0 all k.31
Of course, in (A.4) there is the underlying assumption that the implicit price of a
characteristic j is identical across countries. To avoid this restriction, we may write (A.4)
as:
(A.5)
K
J
K
pik = ∑ δk∑ α jkx ij,k + ∑ δkβk + εik,
k=1 j=1
k=1
30 Hedonic regression was introduced by Court (1939) and revived by Griliches (1961, 1971) to construct
price indices for US cars. The technique was also used to compare purchasing powers across countries by
Kravis and Lipsey (1971) and Kravis et al. (1975), as well as to compute real estate price indices (see e.g.
Case and Quigley (1991) for a recent reference). See Berndt (1991, chapter 4) for an extensive list of
references. Difficulties when interpreting the coefficients have been pointed out by Rosen (1974) and
many others since.
31 Reparametrizing the model by adding a intercept β makes it possible to run this test easily.
0
25
^ = α , all j, k. However, if H is
and check for the restriction by running a test H0: α
jk
j0
0
rejected, one may be in trouble, since the βk alone do not tell the whole story about price
differences across countries.
The advantage of model (A.4) over (A.2) is that one can take into account all
makes sold in a country k, even if they are not sold elsewhere: The role of the term Σjαjxij
is to clean the price of a make (i,k): pik - Σjαjxij can be interpreted as the characteristicfree price of the make and βk is then a geometric average of characteristic-free car prices
in country k. Table A.1 summarizes the tests which have to be run and the cases which can
be tested.
Table A.1
Hypothesis testing for the various models
____________________________________________
Case
Hypothesis tested and accepted
____________________________________________
(a)
(b)
(c)
αjk = αj0
αjk = αj0
-
βk = β0
βk = β0
(d)
____________________________________________
The only case in which there are no price differences across countries is (a); in
case (b), varieties (i.e. differences in characteristics) are not used to price discriminate:
Differences are country specific and not country and variety specific. In case (c), varieties
(or even product lines, as will be seen later) are used to price discriminate. Finally, in case
(d), there is "full" price discrimination: Price differences are variety and country specific.
26
Appendix 2 Price differences in the car market.
Regression results 1988-1990
_________________________________________________________
1988
1989
1990
_________________________________________________________
Intercept
6.1208
(0.0794)
6.2330
(0.0813)
6.1970
(0.0795)
France
0.0168
(0.0166)
-0.0055
(0.0174)
0.0015
0.0172)
Germany
0.0667
(0.0167)
0.0520
(0.0181)
0.0399
(0.0179)
Italy
0.1407
(0.0165)
0.1527
(0.0177)
0.1237
(0.0175)
UK
0.2314
(0.0169)
0.2199
(0.0180)
0.2021
(0.0178)
Diesel
0.1319
(0.0168)
0.0886
(0.0173)
0.1063
(0.0174)
E. Capacity (100cc)
0.0250
(0.002)
0.0300
(0.002)
0.0290
(0.003)
Length (cm)
0.2690
(0.021)
0.2450
(0.022)
0.2700
(0.021)
Speed (100Km/H)
0.8120
(0.043)
0.7960
(0.042)
0.7840
(0.041)
R2
0.910
0.901
0.898
600
600
600
n
_________________________________________________________
The dependent variable is the logarithm of prices.
27
Appendix 3 Pricing by origin
____________________________________________________________________________________
ex-France
ex-Germany
ex-Italy
ex-U. K.
ex-Japan
______________________________________________________________________
Belgium
1983
1984
1985
1986
1987
1988
1989
1990
94
88
90
86
93
95
94
100
100
100
100
100
100
100
96
96
92
91
100
100
98
86
79
84
91
101
103
99
96
105
102
France
1983*
1984
1985
1986
1987
1988
1989
1990
105
100
100
100
100
100
100
100
100
105
110
116
117
97
99
94
100
98
101
101
96
96
96
97
100
92
92
91
100
101
105
96
100
101
101
104
Germany
1983*
1984
1985
1986
1987
1988
1989
1990
100
98
93
95
92
92
92
91
105
100
100
100
100
100
100
100
100
99
101
98
93
95
96
91
100
87
84
87
98
-
100
93
94
92
Italy
1983*
1984
1985
1986
1987
1988
1989
1990
100
89
91
97
97
94
93
97
100
92
99
106
111
101
97
93
109
100
100
100
100
100
100
100
100
77
75
91
99
89
99
93
100
107
115
112
United Kingdom
1983*
1984
1985
1986
1987
1988
1989
1990
100
103
100
105
93
92
94
96
100
111
114
116
112
100
106
106
100
99
100
102
94
91
98
96
100
100
100
100
100
100
100
100
103
96
100
96
______________________________________________________________________
* See text. The dependent variable is the logarithm of prices.
28
Regression results by country 1988-1990
_______________________________________________________________________
Belgium
France
Germany
Italy
UK
_______________________________________________________________________
Intercept
1989
1990
France
France 1989
France 1990
Germany
Germany 1989
Germany 1990
Italy
Italy 1989
Italy 1990
UK
UK 1989
UK 1990
Japan
Japan 1989
Japan 1990
Other
Other 1989
Other 1990
Diesel
E. Capacity (100cc)
Length (cm)
Speed (100Km/H)
R-square
n
9.9066
(0.111)
0.0162
(0.027)
0.0536
(0.029)
-0.0714
(0.034)
0.0238
(0.048)
0.0072
(0.049)
0.0000
( - )
0.0000
( - )
0.0000
( - )
-0.0007
(0.053)
-0.0009
(0.070)
-0.0176
(0.070)
0.0086
(0.098)
0.0238
(0.138)
-0.0159
(0.138)
-0.0389
(0.032)
0.0841
(0.045)
0.0561
(0.045)
-0.0349
(0.045)
0.0153
(0.064)
0.0400
(0.063)
0.0731
(0.022)
0.0440
(0.003)
0.2380
(0.031)
0.7240
(0.060)
0.902
360
8.3772
(0.106)
0.0222
(0.022)
0.0857
(0.023)
0.0000
( - )
0.0000
( - )
0.0000
( - )
-0.0293
(0.037)
0.0183
(0.037)
-0.0336
(0.038)
-0.0363
(0.047)
-0.0016
(0.063)
0.0009
(0.062)
0.0064
(0.065)
0.0424
(0.091)
-0.0488
(0.091)
0.0120
(0.064)
0.0176
(0.110)
0.0268
(0.110)
-0.0952
(0.048)
-0.0445
(0.066)
-0.1223
(0.066)
0.1118
(0.021)
0.0320
(0.004)
0.2510
0.028)
0.6310
(0.057)
0.885
360
6.8584
(0.098)
0.0341
(0.019)
0.0636
(0.019)
-0.0815
(0.034)
-0.0004
(0.050)
-0.0161
(0.050)
0.0000
( - )
0.0000
( - )
0.0000
( - )
-0.0504
(0.049)
0.0142
(0.068)
-0.0419
(0.069)
-0.0721
(0.029)
0.0060
(0.040)
-0.0093
(0.040)
-0.0967
(0.059)
0.0029
(0.083)
-0.0553
(0.083)
0.1132
(0.021)
0.0200
0.002)
0.2700
(0.025)
0.9190
0.045)
0.921
360
13.7238
(0.101)
0.0430
(0.021)
0.0713
(0.021)
-0.0605
(0.029)
-0.0118
(0.041)
0.0295
(0.041)
0.0056
(0.026)
-0.0358
(0.036)
-0.0740
(0.036)
0.0000
( - )
0.0000
( - )
0.0000
( - )
-0.1222
(0.083)
0.1150
(0.117)
0.0511
(0.143)
0.0664
(0.116)
0.0744
(0.142)
0.0457
(0.141)
-0.1011
(0.046)
0.0201
(0.064)
-0.0245
(0.070)
0.0230
(0.025)
0.0280
(0.004)
0.2910
(0.026)
0.6790
(0.061)
0.914
360
6.0386
(0.104)
0.0298
(0.029)
0.1103
(0.032)
-0.0869
(0.038)
0.0213
(0.053)
0.0488
(0.053)
0.0012
(0.029)
0.0536
(0.041)
0.0529
(0.043)
-0.0916
(0.066)
0.0743
(0.093)
0.0474
(0.089)
0.0000
( - )
0.0000
( - )
0.0000
( - )
-0.0440
(0.039)
0.0452
(0.055)
0.0038
(0.055)
-0.1846
(0.042)
0.0041
(0.060)
0.0930
(0.058)
0.0755
(0.033)
0.0230
(0.003)
0.2460
(0.028)
0.8540
(0.054)
0.917
360
_______________________________________________________________________
The dependent variable is the logarithm of prices.
29
Appendix 4 Regression results by class 1988-1990
________________________________________________________________
Small
Medium
Family
Luxury
________________________________________________________________
Intercept
6.9379
(0.130)
0.0741
(0.031)
0.1057
(0.032)
6.5662
(0.232)
0.0362
(0.033)
0.0839
(0.033)
6.3663
(0.221)
0.0154
(0.025)
0.0607
(0.025)
7.0042
(0.225)
0.0620
(0.034)
(0.1262
(0.033)
0.0707
(0.028)
0.0268
(0.024)
0.0663
(0.024)
0.0221
(0.032)
0.0113
(0.031)
0.0555
(0.032)
-0.0500
(0.027)
0.0395
(0.027)
0.1089
(0.027)
0.0501
(0.045)
0.0175
(0.051)
0.0837
(0.050)
0.1232
(0.033)
0.0544
(0.034)
0.0643
(0.035)
0.1096
(0.033)
0.0201
(0.031)
0.0501
(0.031)
0.0541
(0.025)
0.0468
(0.026)
0.0915
(0.026)
0.0139
(0.035)
0.0426
(0.033)
0.0780
(0.040)
0.1681
(0.029)
0.0648
(0.026)
0.0893
(0.025)
0.1744
(0.033)
0.0438
(0.033)
0.0536
(0.033)
0.1103
(0.026)
0.0663
(0.027)
0.0474
(0.027)
0.0744
(0.0370)
0.0787
(0.040)
0.1171
(0.040)
0.3181
(0.034)
0.0060
(0.034)
0.0620
(0.034)
0.2378
(0.033)
0.0574
(0.032)
0.0514
(0.033)
0.2459
(0.024)
0.0147
0.023)
0.0479
(0.023)
0.1622
(0.036)
0.0922
(0.035)
0.1079
(0.036)
Diesel
0.0220
(0.023)
0.1495
(0.024)
0.2040
(0.015)
0.1058
(0.021)
E. Capacity (100cc)
0.0350
(0.004)
0.0190
(0.005)
0.0090
(0.002)
0.0260
(0.002)
Length (cm)
0.0350
(0.004)
0.1350
(0.053)
0.1760
(0.048)
0.1330
(0.047)
Speed (100Km/H)
0.6080
(0.048)
0.9000
(0.063)
1.0520
0.038)
0.7140
(0.056)
0.798
0.693
0.830
0.741
482
483
431
404
1989
1990
France
France 1989
France 1990
Germany
Germany 1989
Germany 1990
Italy
Italy 1989
Italy 1990
UK
UK 1989
UK 1990
R2
n
________________________________________________________________
The dependent variable is the logarithm of prices.
30