“Rip-Off Britain” has turned into a damp squib. Economists are unlikely to be surprised.
“Rip-off Britain” has turned into something of a damp squib. It turns out that some goods cost more in Britain than elsewhere, some cost less, and others cost much the same. Time, perhaps to move on to a different question. When would you expect goods to cost more in Britain, when less, and when should they cost much the same?
If goods are internationally tradeable, if they are produced and sold in perfectly competitive markets, if there are no barriers to trade, such as tariffs and transport costs, and if consumer taxes are much the same, then we should expect to pay much the same for them everywhere. This is true regardless of the level of exchange rates or their recent movement. This principle was enunciated by Alfred Marshall in the nineteenth century as the law of one price: there can only be one price for identical goods in a single market.
However there are hardly any items for which these conditions hold. The most likely candidates among consumer products are goods that are unbranded and largely undifferentiated – and it was this sort of good that Marshall had in mind when he wrote about the law of one price. Agricultural commodities would seem to meet the bill, but nowadays the Common Agricultural Policy and other anti-competitive policies so mess up world agricultural markets that food prices are far from uniform.
Petrol is another possibility, but in Britain most of what we pay for a litre of petrol is duty. Tax on petrol varies across Europe, and is much higher everywhere in Europe than in the United States. Still, if you look at petrol prices net of consumer taxes, they do pretty much follow Marshall’s law of one price. If we continue to look for goods that ought to cost the same, we are left with commodities like the ones you find in do-it-yourself stores – screws or lengths of copper pipe. I have never tried buying either of these in Nashville or Nuremberg, but I would be surprised if the tag was not similar once you’ve adjusted for the difference between Tennessee sales tax and German VAT.
But even for these things there are other reasons why prices will differ. When you buy something in a shop, you purchase a bundle of two things – the copper pipe and the service of retailing the copper pipe. In all honesty the service of retailing you the copper pipe is not a very large or very sophisticated one. Still, you have to source the pipe, transport it to a warehouse near you, staff the warehouse and heat it, and collect the money at the checkout. These activities account for perhaps a quarter of the price you pay. However, when you buy designer clothes in a boutique, the retailing service is more extensive – the taste of the shop’s buyer, the attention of sales assistants, the copies of Vogue and Tatler for your impatient partner to read, and the elegance of the surroundings. These things will cost you more than the clothes themselves.
Retail services are not tradeable goods. The copper pipe comes to you from wherever in the world it is made: you go to wherever the service of retailing is provided. Maybe lastminute.com is going to change all that, but with a turnover last year around .001% of Wal-mart’s, it hasn’t done so yet.
The economic factors equalising the price of non-tradeables are much weaker than those for tradeables. Differences in wages and property values create large differences in costs, and our ability to fly elsewhere to buy does little to undermine these. It is cheaper to have your hair cut in rural India than in Manhattan, but so what: the two products barely compete with each other and the price differential will remain. Most of the really striking price differentials between countries are in services – which we notice because we consume them extensively as tourists – rather than in traded goods. Since land is scarcer and unskilled labour more expensive in Germany than in Tennessee, the retail service component of your copper pipe will cost a little more there. And – other things being equal – so will most of the things you buy in German shops.
But other things are rarely equal. Most traded goods are not produced and sold in perfectly competitive markets. Although many economists would give you a different impression, there is nothing pejorative about that. All books and compact discs are slightly different from each other. Branding has an important and respectable role in a market economy. Some companies’ products are distinguished from the rest by the excellence of their engineering or the reputation they have established with their customers.
These attributes enable companies to charge different prices for the same goods in different countries, even if there are no trade or tariff barriers. Sometimes these differences in competitive condition are differences in the structure of the market. Cars are still expensive in Britain because of the costly legacy of the British government buying market share for its uneconomic flag carrier. Britain, Germany and the United States allow the domestic pharmaceutical market to support their strong research based industries. France and Italy have lower prices and markets that include many local clones of internationally produced drugs. Differences in income per head govern the ability of customers to pay, and the prices of competing services, so most items tend to cost a little more in richer countries.
But most intriguingly, attitudes to competing goods matter a lot. Sometimes it pays to be different. Coca Cola is still trying to persuade French parents of the virtues of the eponymous drink. Usually, it is better to have the same tastes as the locals. Buy your cornflakes in Britain and your roasted coffee in France, because otherwise you will have to pay more at the delicatessen counter. When in Rome, do as the Romans do, is economic as well as prudent advice.