Academic journal article Economic Inquiry

Did the Euro Foster Online Price Competition? Evidence from an International Price Comparison Site

Academic journal article Economic Inquiry

Did the Euro Foster Online Price Competition? Evidence from an International Price Comparison Site

Article excerpt

I. INTRODUCTION

The Euro became a reality for consumers in 12 nations on 1 January 2002, when it was introduced for retail transactions in all the participating countries. (1) Prior to this, retail transactions were conducted in local currencies. Although there were many macroeconomic and political reasons for the implementation of a single currency, one consumer-based argument made in favor of the Euro's introduction was that a single currency would facilitate the transparency of prices across Europe and reduce transaction costs associated with currency exchange. Pedro Solbes, the European Union (EU) Commissioner for Economic and Financial Affairs, suggested that "trading in the same currency across borders lowers costs while cross border price transparency encourages competition." (2)

Presumably, the mechanism that Solbes has in mind by which price transparency encourages competition is through increasing the intensity of consumer search across countries. Internet price-comparison sites offer a natural place to look for such effects given that geographic boundaries are irrelevant online and price transparency in this setting makes it fairly easy for consumers to identify bargains and arbitrage price differences within and among Eurozone countries. (3) In this article, we study the dynamics of online retail pricing in the period immediately before and immediately after the retail introduction of the Euro to assess its impact, using retail price data that we collected from Kelkoo--the leading Internet price-comparison site in the EU.

Our analysis is based on a data set that has several features that distinguish it from the extant literature. (4) We collected firm and price information from the Kelkoo sites in seven EU countries: four in the Eurozone and three outside it. Our study focuses on pricing for 28 products across a variety of product categories and price points. We obtained price information during a period that straddled the introduction of the Euro; thus, we are able to look at variation both pre- and post-Euro introduction as well as variation between pricing inside and outside the Eurozone. To our knowledge, this is the first study that offers as many cross-country comparisons of online prices and covers as broad a range of products. (5) We believe this to be one of the first academic studies regarding the impact of the Euro on retail pricing. (6) By including four Eurozone and three non-Eurozone countries in the study, we examine what some might view as a "natural experiment" on the impact of this important monetary reform on pricing behavior.

We recognize that there are differing views of the relevant transaction price to use in comparing prices in online markets. Some have taken the position that identical products sold by different firms in online markets are homogeneous and, therefore, that a majority of consumers using a price-comparison site will purchase at the minimum listed price; see Baye and Morgan (2001). In this case, the relevant price to compare pre- and post-Euro is the minimum price. On the other hand, one might reasonably argue that price differences for identical products stem from heterogeneities in service or reputations and that firms charging higher prices also enjoy sales--note the work of Narasimhan (1988), Pan et al. (2001), and Baye et al. (2004). In this case, the natural comparison is the average price charged by all firms in the market. The absence of sales data precludes us from discriminating between these two extreme views; therefore, we study both average and best-quoted (minimum) prices online.

Figure 1 depicts the trend in the difference in prices over time. In this figure, we plot the difference in the average price and the difference in the average minimum price between the Eurozone and the non-Eurozone on a weekly basis. Negative numbers indicate that prices in the Eurozone are lower than those in the non-Eurozone and positive figures indicate the reverse. …

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