Analyse of the effects of price transparency in Europe

Price transparency is a property of efficient markets, and refers to complete comparability of prices for similar goods, across different market segments. It may be looked at in terms of lowering the transaction costs of using markets. As, a consequence, markets should be used more heavily and the goods and services purchased should become a better 'fit' to purchasers' information. Lack of price transparency was common before modern economies become more information intensive, or knowledge based.

Lack of transparency was preferences. As a result, prices could vary significantly across market supported by factors like tax structures, distributor margins, and consumer segments, especially when they were partially dispersed, or in other ways (e. g. culturally, socially or nationally) separated. A major factor encouraging the demise of non-transparency in pricing has been the development of information technology e. g. personal computers, mobile phones.

Above all, the Internet has heralded the arrival of the information age, bringing with it a quantum leap in the quality and volume of accurate price information. What is Euro price transparency? It is anticipated that the adoption of the Euro will promote price transparency throughout the Eurozone. This is because a common currency like the Euro will make price differentials for similar goods and services more evident to buyers. Previously, price differentials could be quite marked, particularly across different nations for similar goods and services.

For example, a family salon car could be priced 40 per cent higher than in Italy, and a popular soft drink could be priced twice as high in Germany as in Spain. These examples refer only to retail prices, but the same could be said of intermediate prices relating to "business to business" activity further up the supply chain. The introduction of the Euro is already having the effect of reducing this price differentials, as better informed businesses and consumers effectively 'arbitrage away' price differentials for similar goods and services by competitively seeking the best deals.

Thus, price transparency in the Eurozone should help consumers and businesses discover the best terms of purchase for final and intermediate goods, as well as assisting them in avoiding poor terms of purchase arising from ignorance generated by the 'mask' of different national currencies. Further, Euro price transparency is being facilitated by the development of e-commerce, including e-tailing on the Internet. Price Transparency is driven by four rapidly developing pressures:

* The move to a single currency - the Euro - in 12 countries in Europe * The growth of eCommerce * The increasing effectiveness of competition policy at both EU and national level, for example VW-Audi * The completion of the Single Market by liberalising and privatising telecommunications and energy companies Differences in Euroland Prices in Euroland remain surprisingly varied. As chart 1 shows, there is a spread of 20 percentage points in the overall pricing between member states, Spain being overall the cheapest. (Source: European Commission)

It is sometimes argued that differences on small items of fast moving consumer goods are not serious because consumers are unlikely to travel internationally just to buy a tube of toothpaste. This ignores, however, the fact large numbers of people in Europe who live within easy drive of a frontier and, even more importantly, the actions of 'parallel trade' wholesalers who tend to even out price differences. Thus courier company UPS reports that they are shipping containers of toothpaste from Germany to Sweden because of the price difference.

Similarly, parallel traders out of southern Germany supply many consumer goods in northern Italy. Differences in indirect taxes (VAT and other indirect taxes) explain to some degree these prices gaps, certainly for cars, in the Eurozone. The remaining part of these price gaps is caused by the price discrimination by manufactures. In the UK, price reductions resulting from the pressures of transparency are doubly interesting, as they show that sterling currency does not insulate UK businesses from its effects. The introduction of Ecommerce permits instant price comparison across frontiers.

This is particularly significant for 'big ticket' items and financial services products Differences in the price of 'big ticket' items - cars for consumers and capital goods for commerce. Car Prices The European common currency, the Euro, has not lessened the disparity between car prices in the European Union member countries. Consumers continue to pay more in the UK, Germany and Austria while prices are lower in Spain, Greece, Finland and Demark, says a recent survey by the European Commission. One of the largest difference in pricing was for a Fiat Seicento which cost i?? 4,893 in Spain but was 63% more expensive at i??

7,975 in the UK. 'Should we reduce our prices, we promise to refund you the difference', said the Ford Motor company, in its 1999 advertisements. What led them to make this claim and why did they need to announce it as a major advertising campaign? It was one of the most dramatic recent signs of the pressures of price transparency. It proved prescient, because since the autumn of 2000 all major car manufacturers have had to reduce their prices in the UK substantially. They had a long way to go, since at the time of the Ford advert, UK prices were as much as 40% above the EU average as table 1 shows.