Thursday, 5 July 2012

Retail price differences across countries: economically sound...but very annoying

There has been a lot of press lately about the extent to which international congolomerates charge significantly different prices in different countries.  In fact it has become such a politically hot topic in Australia that the government launched an investigation into the issue and are holding parliamentary inquiries into the topic.  The Austrlaian Productivity Commission released a great report in 2011 which spelled out why there are pricing differences between different countries and it is definetely worth a read.

Retailers often try and explain the difference away by talking about higher minimum wage standards, the highest retail rent costs in the world, high costs to ship to Australia as well as high taxes.  Savvy consumers though have pointed out that even when you take these into account Australians still get significantly charged more for exactly the same product than overseas consumers do.  Actually the big issue is that (and this is spelled out pretty clearly in the Productivity Commission's report above) wholesale prices for Australian retailers are much higher than those incurred by retailers in other markets.  Thus it is the multinational manufacturers who are causing the significant price difference that Australian consumers face.

For anyone that has studied economics however the fact that companies that operate across countries charge different amounts for different products should not come as a suprise to anyone.  It all has to do with price discrimination which is charging different prices to different consumers to the same product.  This actually occurs all the time, you only have to look around you to see lots of examples such as:
  • Discounts for seniors for the same products
  • Concession rates for students
  • Cheaper rates for those who choose to buy in bulk
  • Cheaper prices on the same product but 'cheaper stores'
The common rebuttal to most of the above is that they get cheaper rates 'because they cannot afford to pay as much'.  Actually this is exactly the right answer - it all has to do with willingness to pay or what is also called elasticity of demand.  A full wage earner is willing to pay more for the same product for a senior or a student so if you as a seller can sell at one price to one consumer and one price to another you can maximise both demand for your product and the price you recieve (thus maximising your profits).

Thus companies that charge different prices to different countries of customers are doing exactly the same thing which as I mentioned above makes complete economic senese.  However the system only works as long as those who are paying the higher price have no way of buying the good for the lower price.  In traditional price discrimination companies use things like seniors / concessions cards / volume to seperate the lower paying customers from the higher ones. 

The current fly in the ointment for these companies though is parallel importers who make a profit by buying at the lower prices overseas and then selling over the internet into Australia.  Australian consumers are obviously loving this and helped by the exchange rate at record highs have been buying from overseas in larger and larger quantities.  Companies have responded by trying to ban their retailers from selling into Australia but have run up against competition issues (i.e. you run afoul of the competition laws in Australia because you essentially are forming an agreement to keep prices higher).

By doing this the companies have also put consumer offside.  Consumers now realise that they are being overcharged.  I think to some extent consumers are blaming the wrong people.  The people to blame are the multinationals not the Australian retailers.  It will be interesting to see where the issue ends up.  In the mean time I will continue to import my goods from overseas and avoid Australian retailers completeliy.

Next week I'm planning on doing a post seeing whether I can financial import a luxury car into Australia and save tens of thousands of dollars.  One of my friends sent me a spreadsheet which says it can be done but I'm going to test his assumptions to make sure.

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