ASK: NUS ECONOMISTS
By Gilbert Neo And Davin Chor, Published The Straits Times, 3 Jul 2014
By Gilbert Neo And Davin Chor, Published The Straits Times, 3 Jul 2014
Why is the same product often priced differently in different countries?
IT IS not unusual to hear complaints along the following lines: "Why is the price of an iPhone on Apple's Singapore website much higher than that on its Malaysian website after adjusting for the exchange rate?"
Singapore's policymakers have also shown a keen interest in the subject in light of the cost-of- living issues that Singaporeans are facing.
For example, a joint study was recently commissioned by the Ministry of Trade and Industry and the Monetary Authority of Singapore to perform a price comparison of identical goods in different locations. The study looked at the prices charged by three global brands - Apple, Swedish furniture company Ikea and Spanish clothing and accessories retailer Zara - in 11 major cities around the world. The results, released in April this year, found that prices in Singapore exceeded the median across these locations for about two-thirds of the items surveyed.
The report suggested several potential causes. On the supply side, operating costs differ across locations, in terms of wages, rent and transport costs. Moreover, in smaller markets like Singapore, retailers may lack economies of scale and thus cannot recover their fixed costs as easily unless they raise prices. On the demand side, firms vary prices in response to consumer tastes and the degree of competition they encounter.
As part of research undertaken for his undergraduate thesis, the first author of this article collected the prices of 438 items sold by Ikea, as reported in the company's 2013/2014 online catalogues for various markets. The study focused on the eight Asia-Pacific economies in which Ikea has a store presence. They were: Singapore, Malaysia, Thailand, Hong Kong, Japan, China, Australia and Taiwan. The prices were adjusted to remove local sales taxes and converted to euro currency units for comparison.
Based on this data, the prices of Ikea items were found to be highest in Taiwan, Hong Kong and Singapore. On average, they were about 30 per cent higher than in the country where Ikea products were cheapest (China).
A layman's explanation of this might be that wages and rental are higher in these places, and this may be true. What we were interested to explore was whether other economic variables played a role to explain these price differences.
We found that among economic variables, the degree of competition faced by Ikea matters. The study used data from Euromonitor, a London-based market intelligence firm. This included an indicator tracking the extent to which Ikea was the market leader in the places studied, as well as measures focusing on the degree to which the market was concentrated in the hands of a few large firms. These results show a relationship between Ikea's pricing and whether it is operating in a competitive market: the more competitive the market, the harder it is for Ikea to raise prices too much, keeping prices low. This was true even when we controlled for wage and rent differences.
One implication of this finding is that government policies designed to promote competition may be an important means of ensuring low prices.
But such policies need to be implemented with care. In the case of a small country such as Singapore, there needs to be a delicate balance between encouraging more competition in the consumer market, while ensuring that incumbent firms do not lose too much in terms of the economies of scale (which would cause their operating costs to rise).
A second set of variables that affects prices relates to barriers to arbitrage. Arbitrage involves buying a product where it is cheap, and selling it where it is dear, in order to make a profit. The mere fact that we observe differences in the prices of Ikea products means that there must be barriers preventing profitable arbitrage. Indeed, in our study, the greater the physical distance of one of these markets from Singapore, the larger was the average price disparity in Ikea items compared to Singapore.
This is consistent with the idea that barriers to arbitrage are larger when markets are farther apart. This could be part of the reason why price differences between say China and Singapore are larger than that between Malaysia and Singapore.
There is, however, a lot more room for investigation. When we control for gross domestic product per capita, which tends to be positively correlated with wages, for example, the conclusions regarding competition and barriers to arbitrage hold true.
The existing studies have also been limited to a small number of countries and a handful of consumer industries. We would ideally like to have direct information on the costs faced in each country, in order to get a more precise picture of how such supply-side pressures feed into local prices.
The first writer is a graduating honours student in economics and the second is an associate economics professor, both of the National University of Singapore.
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