Abstract

DOI: https://doi.org/10.52903/wp2022319

 

EXPLAINING THE ENDURANCE OF PRICE LEVEL DIFFERENCES IN THE EURO AREA


Huw Dixon
Cardiff Business School

Theodora Kosma
Bank of Greece

Pavlos Petroulas
Bank of Greece

ABSTRACT

In this paper we anaIyse price level differences in the euro area focusing on the impact of market structure and exploring how consumer behaviour can influence firms’ pricing. We consider two elements of market structure: producer market competition structure and the less explored structure of retail market competition. Regarding consumer behaviour we focus primarily on consumer habits. To this effect we utilise an extensive data set on retail prices and quantities for 41 product categories of fast-moving consumer goods across 58 regions in 10 euro area countries. Our results indicate that observed price differences reflect effects from diverse sources. The competition structure of the goods’ producers is found to be an important determinant of price differences. However, we also find that retail market structure and consumer habits also matter, explaining a significant and economically meaningful share of observed price differences. This points to possible new and important determinants of price differences across countries that go beyond the traditional goods market structure.

JEL-classifications: D4, E31, F41, C23
Keywords: Market structure, consumer behaviour, international relative prices, law of one price.


Acknowledgement: The bulk of this paper was done while the authors were involved in the Nielsen Price Analysis Project sponsored by the Eurosystem. We gratefully acknowledge helpful input and comments from Mario Crucini, Dan Hosken, Patrick Sevestre, Aidan Meyler, Concetta Rondinelli, Peter McQuade, Boele Bonthius, David Cornille and other participants of the Nielsen network. The views expressed in this paper are those of the authors and do not reflect those of the Bank of Greece. We are also grateful for the excellent work conducted by Stefanos Dimitrakopoulos in compiling the database and to S. Muzikarova excellent research assistance.

Correspondence:
Theodora Kosma
Bank of Greece
21 E Venizelos Ave,
Athens, 10250, Greece,
email: tkosma@bankofgreece.gr


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