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A key argument for the introduction of the euro was that it would make prices transparent across Europe, thereby fostering competition and lowering prices. But research by Michael Baye, Rupert Gatti, Paul Kattuman and John Morgan reveals that in fact online shoppers in the eurozone have lost out relative to their counterparts elsewhere in the European Union (EU) following the currency changeover. Their results were presented at the Royal Economic Society’s Annual Conference.
The researchers find that the euro changeover neither mitigated price differences nor resulted in purchasing power parity for products sold online, either within or between countries. In fact, average prices charged by e-retailers within the eurozone increased by about 6% relative to those in EU countries not adopting the euro. The impact on the minimum or best prices in each country was even more dramatic, with the lowest online prices in the eurozone rising by 11% relative to non-eurozone e-retailers.
One popular explanation for price increases associated with the introduction of the euro has been that retailers held off making anticipated price rises until the euro was introduced (to avoid the cost of changing prices twice in short succession). In fact, the dynamics of price movements observed in this study do not support this explanation.
The researchers offer an alternative explanation that is not only consistent with observed pricing behaviour, but which has potentially significant long-term implications for prices and welfare. The increase in competition for well informed and price sensitive consumers across eurozone countries may have encouraged firms to shift their focus towards selling products at higher average prices to domestic customers who are less informed and more brand-loyal. In other words, the results suggest that the arrival of the euro benefited informed consumers at the expense of the less well informed.
The research also highlights the role of competition in fostering lower prices. Relative to markets where only one firm lists a price for a product, there is a 3% decline in average prices when a second firm is in the market. There is a 4% decline when three firms compete and a 6% decline when more than three firms list prices (correcting for product differences, countries and time).
The results for minimum quoted prices are even more dramatic. The addition of a second firm leads to a 12% reduction in minimum price. When three firms list prices, there is a 16% reduction; and when more than three firms list prices, the minimum price fall by 20%.
From a policy perspective, this suggests that the impact of increased market participation is potentially very large and may well outweigh issues that have arguably drawn greater attention, such as tax harmonisation across EU member states.
These findings are based on an extensive dataset collected over a nine-month period straddling the introduction of the euro, October 2001 to June 2002. These data were obtained from Europeâ€™s dominant internet price comparison site, Kelkoo.com, and include the prices charged for 28 specific products sold in seven different EU countries. Four of these countries (France, Italy, the Netherlands and Spain) are members of the eurozone and three countries (Denmark, Sweden and the UK) are not.
The research controls for a variety of other factors that might contribute to post-euro price changes, such as differences in products, product life cycles and changes in the number of firms listing prices in each country. Controlling for these and other factors, average online prices in the eurozone in October 2001 were about 5% lower than in the three EU countries not participating in the euro. But by May 2002, this price advantage had been completely wiped out.
Similar results are observed for the minimum or best prices quoted for each of the products. In October 2001, online shoppers in the eurozone enjoyed 9% lower prices than those shopping in non-eurozone countries but once again this advantage had evaporated by May 2002. Furthermore, significant differences in the average price charged and the best price available in these countries remained throughout the period.
Online Pricing and the Euro Changeover: Cross-country Comparisons by Michael Baye, Rupert Gatti, Paul Kattuman and John Morgan was presented at the Royal Economic Society’s 2003 Annual Conference at the University of Warwick.
Rupert Gatti and Paul Kattuman are at the University of Cambridge; Michael Baye is at Indiana University; and John Morgan is at the University of California at Berkeley.
For further information contact Romesh Vaitilingam on 07768-661095 (email: email@example.com).
Economics in Action is a collaboration between the Royal Economic Society, the Economics Network of the Higher Education Academy and SOSIG, the Social Science Information Gateway. It forms part of the Why Study Economics initiative.