Car Price Differentials in the European Union

Submitted By:
Group 4

Jan1, 1993: The single European act became law among member states of EU

Goal: To remove barriers to cross border trade & investment within confines of EU
Benefits: Increased competition & corresponding reduction in prices Jan1, 1999: EUs member states adopted Euro as common currency Benefits: Would make it easy for the European consumers to compare prices across nations leading to harmonization of prices within Euro Zone

Reason for Persistence of price differentials within EU Since 1985:

Block Exemption Clause:

Regulations that allowed car manufacturers to restrict competition between car dealers.
(Automakers dictated where a dealership could be located, to limit the number of brands that a dealer could sell & prohibit dealer from selling vehicles outside home country) Block exemption clause was scrapped in 2002:

European Commission issued new set of regulations that encouraged competition within EU market (came into full effect in 2005)

1.

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

source of price differentials:

block exemption clause.

Due to this, the car dealers were restricted to carry a free and competitive business among them.
This control on the dealers segmented the market through controlled competition which resulted in such a difference in prices of same cars within the European market. Transportation cost

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

The price of same commodity will be even in a single market because of uniform terms and conditions of trade, same level of tariffs and regulatory frameworks. But, if companies are allowed to control the location and terms of dealership, then the price difference will still exist in single market. Steps to eradicate the price differentials in market:

Complete removal of any barriers to trade

A market driven economy where supply and demand are controlled by the market

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

Reasons behind the UK market being one of the most expensive car markets:

Block exemption clause in EU competition policy: Tight control and lack of competition among the dealers which will make their operation inefficient and costly. High costs of doing business in UK. The purchasing power of the customers in UK might be higher than most other European countries.

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

After the implementation of new regulations: Restriction by the companies on the dealers will be removed, thus enabling free competition and efficiency. The degree of price differentials will decrease in the European market.

5. What will be the impact of these new regulations on a) competitive intensity in the EU automobile market b) Profitability of automobile operations in the EU?
a.

The new regulations shall increase the competition in the automobile market by removing control of the companies over the dealers. Due to the increased competition, their will be more value to the customers. The profitability of the automobile operations would depend on the ability to reduce production cost, innovate and reach scale of economies. If these parameters are achieved profitability would increase.

b.

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

Post 2005, due to impact of new regulations, there shall be increase in the competition in the automobile market.
Companies that would innovate, provide automobiles to the customers at competitive price, superior operation efficiency i.e achieve scale economies at the earliest would do best.