Car Price Differentials in the European Union

The Single European Act became law among the member states of the European Union on January 1, 1993. The goal of the act was to remove barriers to cross-border trade and investment within the confines of the EU, thereby creating a single market instead of a collection of distinct national markets. Among the benefits claimed for this act were an increase in competition and a corresponding reduction in prices. The move toward a single market received another boost January 1, 1999, when the majority of the EU’s member states formally adopted the euro as a common currency. As of 2005, 12 of the 25 member states of the EU used the euro as their currency (these 12 countries are referred to as members of the euro zone). Proponents claimed that the euro would benefit European consumers by making it easier to compare prices across nations, which should in theory lead to the harmonization of prices within the euro zone. For example, as a result of the adoption of a common currency within a single market, a car sold in Germany should in theory be priced the same as a car sold in France.

In the automobile market, the reality has been somewhat different. By the end of 2005, significant variations remained between the prices of the same automobiles in different countries. According to the European Commission, in November 2005 there was a 26.7 percent differential between the price of a Volkswagen Golf in the cheapest and the most expensive national markets in the euro zone. There was also a 22.7 percent differential in the price of a Ford Focus, a 17 percent differential in the price of a  Peugeot 206, and a 13.2 percent differential in the price of an Audi A4 Opel Vectra. However, these differentials with regard to certain models hid the fact that on average, prices have been converging on EU-wide norms. As of late 2005, the average price differential of cars across countries in the euro zone was just 4.4 percent, a marked improvement from November 1999, when the average price differential was 17.5 percent. The average price differential of cars across all EU member states was 6.4 percent in November 2005.

Within the euro zone, Germany was the most expensive car market. In Germany, 38 car models were sold to consumers at the highest prices in the euro zone in November 2005, and 16 of these were 20 percent more expensive than the cheapest national market within the euro zone. Within the euro zone countries, cars are cheapest in Finland. A VW Passat, for example, cost €3,200 less in Finland than in Germany. The United Kingdom is perennially among the most expensive car markets within the EU, with the average new car costing British consumers €800 more than comparable models sold in cheaper EU markets.

One reason for the persistence of price differentials within the EU is that since 1985, regulations have allowed automobile manufacturers to restrict competition between dealers. The “block exemption” clause in EU competition policy allowed automakers to dictate where a dealership could be located, to limit the number of brands that a dealer could sell, and to prohibit a dealer from selling vehicles outside of its home country. For example, Volkswagen might tell a dealer in Belgium that if it wanted to become, or remain, a Volkswagen dealer, it ( a ) could not sell models made by other car companies and ( b ) could not sell Volkswagen cars on its lot to consumers in Germany. This practice effectively allowed automobile companies to restrict competition, segment the European market, and price cars differently in various countries to reflect underlying demand conditions.

In response to persistent complaints from consumers, the European Commission in late 2002 scrapped the block exemption clause and issued a new set of regulations designed to encourage competition within the EU car market. Under the new rules, dealers are allowed to sell anywhere they want to, open new locations where they choose, and sell more than one brand of car. Thus, a Belgian car dealer is now able to sell Volkswagens to German consumers. In a concession to automobile companies, which lobbied against the proposed revisions, the new rules were phased in over three years and took full effect in September 2005.

Case Discussion Questions

1. What are the sources of significant price differentials in the EU automobile market?

2. In a pure single market would these price differentials exist? By what process might price differentials be eradicated?

3. Why do you think the United Kingdom is one of the most expensive car markets in Europe?

4. What do you think will happen to price differentials in the EU automobile market under the new regulations that took effect in September 2005?

5. What will the impact of these new regulations be on

( a ) competitive intensity in the EU automobile market and ( b ) the profitability of automobile operations in the EU?

6. Which automobile companies will do best in the post-2005 environment?