A report by the European Union EU, found that on average UK car prices were 10% higher than in EU. In some cases, the difference in price could be much greater. Some people have taken advantage of this price difference to buy a new car on the continent. [BBC report]
OCR exam question: Discuss factors that might explain differences in Car Prices across Europe
1. Purchasing power of Pound. Quite a few goods tend to be more expensive in the UK than the continent.
2. Different Living Costs. Exchange rates don’t always reflect local purchasing power of currencies. For example, in Poland living costs are relatively low, reflecting lower wages and lower cost of renting. Garages in UK, have to charge higher prices to cover the cost of renting in the UK.
3. Tax Rates. UK has higher tax rates on new cars. However, the price differences look at pre tax prices.
4. Price Discrimination. It is argued demand is more inelastic in the UK, UK consumers have less alternatives. This enables UK prices to be higher.
5. Monopoly Power. Car firms in UK have monopoly power to set higher prices.The european market is more competitive and this helps keep prices down. Many UK car dealers were found to have close ties and arrangements with car firms to keep prices high. However, this has slightly been reduced since the introduction of car supermarkets.
6. Labour Costs. Producing cars is relatively labour intensive. Therefore, higher wages will increase cost. However, recently car production has become more capital intensive with greater use of machines. Therefore, labour costs are less significant. This means that high wage economies like Germany can still compete with China.