The market for cars in Western Europe is far from being the integrated market envisioned in the EU's internal market programme. Instead it is segmented into national markets with the support of a block exemption from EU competition law. The exemption allows car manufacturers to maintain a system of exclusive and selective distributors. This means that manufacturers select a limited number of distributors, and that the distributors are allowed monopoly powers within designated geographical areas. Manufacturers and distributors have taken advantage of the system to prevent arbitrage by consumers across national borders in order to support the profitable practice of tailoring prices to the conditions in each national market.

In Discussion Paper No. 1181, Research Fellow Harry Flam and Research Affiliate Håkan Nordström examine a sample covering 43 models making up 80% of car sales in 11 countries in 1989–92. They 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. This price discrimination seems to be driven largely by taxes, tariffs and import quotas. Their findings, however, do not lend themselves to conclusions about the economic benefits or costs of the existing price discrimination for cars in Western Europe, and hence on the social value of the block exemption from EU competition law that has been given to the industry. Elimination of price discrimination can in this, as in the general case, be beneficial as well as detrimental to economic welfare.

Why do Pre-tax Car Prices Differ So Much Across European Countries
Harry Flam and Håkan Nordström

Discussion Paper No. 1181, May 1995(IT)