The Evolution of Price Dispersion in the European Car Market

Pinelopi Koujianou Goldberg, Frank Verboven

NBER Working Paper No. 6818
Issued in November 1998
NBER Program(s):   ITI

Car prices in Europe are characterized by large and persistent differences across countries. The purpose of this paper is to document and explain this price dispersion. Using a panel data set extending from 1980 to 1993, we first demonstrate two main facts concerning car prices in Europe: (1) The existence of significant differences in quality adjusted prices across countries, with Italy and the U.K. systematically representing the most expansive markets; (2) Substantial year-to-year volatility that is to a large extent accounted for by exchange rate fluctuation and the incomplete response of local currency prices to these fluctuations. These facts are analyzed within the framework of a multiproduct oligopoly model with product differentiation. The model identifies three potential sources for the international price differences: price elasticities generating differences in markups, costs, and import quota constraints. Local currency price stability can be attributed either to the presence of a local component in marginal costs, or to markup adjustment that is correlated with exchange rate volatility; the latter requires that the perceived elasticity of demand is increasing in price. We find that the primary reason for the higher prices in Italy is the existence of a strong bias for domestic brands that generates high markups for the domestic firm (Fiat). In the U.K. higher prices are mainly attributed to better equipped cars and/or differences in the dealer discount practices. The import quota constraints are found to have a significant impact on Japanese car prices in Italy, France, and the U.K. With respect to local currency price stability, 2/3 of the documented price inertia are attributed to local costs, and 1/3 to markup adjustment that is indicative of price discrimination. Based on these results, we conjecture that the EMU will substantially reduce the year-to -year volatility observed in the car price data, but without further measures to increase European integration, it will not completely eliminate existing cross-country price differences.

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Document Object Identifier (DOI): 10.3386/w6818


  • Review of Economic Studies, Vol. 68, no. 4 (October 2001): 811-848 citation courtesy of
  • as Goldberg, Pinelopi Koujianou, Frank Verboven, Fiona Scott Morton, John Fingleton. "Cross-country Price Dispersion In The Euro Era: A Case Study Of The European Car Market," Economic Policy, Vol. 19, no. 40 (October 2004): 484-521

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