DP1181 Why do Pre-tax Car Prices Differ so Much Across European Countries?

Author(s): Harry Flam, Håkan Nordström
Publication Date: May 1995
Keyword(s): Market Segmentation, Price Discrimination, Voluntary Export Restraint
JEL(s): F13, F15
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1181

The European car market is segmented by regulatory measures that support price discrimination by manufacturers and make consumer arbitrage difficult and costly. In a sample covering 43 models making up 80% of car sales in 11 countries in 1989-92, we find that the average standard deviation of pre-tax prices across markets is 14%. The difference between the maximum and minimum price is typically about 50% of the average price. The price discrimination seems to be driven largely by taxes, tariffs and import quotas. For example, a quota raises the pre-tax price of the average Japanese car by 12% and of the average competing European car by 7%.