Price discrimination and tax differences in the European motor industry

Abstract

The harmonisation of taxation within the European motor industry is one element in the evolution of a common transport policy, and, more generally, in the elimination of all barriers between the EC’s national markets. The slow pace at which such a harmonisation has proceeded is perhaps indicative both of the differences in national economic policies and goals, and of the differential performance and industrial structure of this sector among the Member States. While considerable progress has been made towards free intra-EC trade, this study of the motor industry reveals the extent to which certain markets may still be insulated from significant elements of competitive behaviour. It is demonstrated that the harmonisation of the remaining differences between the national tax systems will not be sufficient to promote a full integration of the Community’s car markets. The present tax differences are shown to explain only a small proportion of the variation in price levels between countries. Price discrimination is shown to be both significant and persistent¹ within the European Community. Further sources of this discrimination are shown to lie in differences in price elasticities, in industrial concentration and a lack of price competition and in other features specific to the United Kingdom car market. The principal theme to emerge below is that the welfare gains to European consumers might be better promoted by a furthering of competition within the Community rather than by the harmonisation of taxation per se. This will necessarily involve an examination of producer collusion, unwarranted differences in product specification, the control of dealer networks, discriminatory licensing practices, refusal to supply across national boundaries, etc.

The author is grateful to Keith Cowling, John Cubbin and Denis Leech for the use of their data. John Cubbin made many helpful comments during the preparation of this paper and the author is especially grateful to Richard Bird, Sijbren Cnossen, John Kay, Roger Smith and Dirk Wolfson for their comments during and after the ISPE Conference. The usual disclaimer applies. Financial support from the ESRC is gratefully acknowledged.