Determinants of cross border shopping in the border region of the Netherlands, Belgium and Germany: theory and empirical results.

• Author: Pollok, Patrick
• Position: Report

1. CROSS-BORDER-SHOPPING IN THE EUREGIO-MEUSE-RHINE

   The development towards an integrated European Economic Area in the past two decades has led to far reaching harmonization processes within the European Union (EU). The simplification or even removal of many trade barriers and bureaucratic formalities, improvement of travel options, and perhaps most notably, the European Monetary Union (EMU), have contributed to greater cross border trade in finance and goods (Lane 2006, Sosvilla-Rivero/Gil-Pareja 2004). This ongoing European integration process is predicted to have a significant impact on competition, price levels, as well as price dispersion.

   While the establishment of exchange rate stability within the euro zone, due to the introduction of a single currency, should stimulate cross border arbitrage and boost trade among the EU member states, an increased price transparency as well as decreasing transaction costs should induce more intensive competition and reduce price dispersion across countries (Engel/Rogers 2004, Allington/Kattuman/Waldmann 2005, Egert/Silgoner 2007, Davidson et al. 2002). While Rose (2000), as well as Micco, Stein, and Ordonez (2003) empirically demonstrated the significant positive effects of a currency union on encouraging trade among member countries, the effect of the European integration process on cross border price differentials is not as far reaching as to fully eliminate price differences between member states. Hence, although empirical studies have shown that a process of price convergence has actually taken place in Europe in the last few decades, these studies at the same time report only moderate tendencies of further alignment of prices within the euro area, indicating that the European integration process so far has put only modest pressure on cross border price differentials (Siems/Hammer 2011a, 2011b, EUROSTAT 2010).

   This fact is illustrated in Figure 1, showing the development of comparative price levels of selected EU member states in percentage of the EU27-average. The figure indicates that although prices have converged within the EU in the past 15 years, the requirements for a single European price for identical goods across countries are not yet met in Europe. Taking a closer look at the development in Sweden and Spain, we see that price levels in both countries have obviously moved toward the EU27-average. While Sweden's price level in 1995 was at 125.8 % of the EU27-average, the price level in Spain was considerably lower at 89 %. Until the end of 2009 the difference in price levels between the two countries decreased by 26.9 % (from 36.8 % to 9.9 %) (EUROSTAT 2011a).

   However, comparing the current price levels in the EU altogether, it becomes evident that distinct price differences between member states still exist. A look at Figure 2, depicting the development of the variation coefficient of comparative price levels in Europe between 1995 and 2009, indicates this trend more clearly. Here we see that, although the coefficient of variation of comparative price levels within the EU27 as a whole has declined significantly during this 15-year period, prices do still vary considerably (in 2009 the variation coefficient was still at a relatively high level of 25.1 %).

   Reduced transaction costs as well as the price transparency effect and the elimination of exchange rate risks in the course of the European Monetary Union, should encourage consumers to engage in arbitrage activities in order to exploit the existing price differentials. Against this background, the option for consumers to shop across country borders (Cross Border Shopping) becomes more and more attractive.

   Even though the product price is regarded to be the dominant driver of cross border shopping behavior in the literature (see for example: Bygvra 1998, Di Matteo/Di Matteo 1996, Evans/Lane/O'Grady 1992, Goh et al. 2007, Lau et al. 2010, Piron 2002, Wang 2004), it is clear that private arbitrageurs only engage in cross-border shopping if the expected benefits are worth the trouble. Thus potential cross border shoppers have to be considered as individuals who seek to maximize the total utility of a purchase. Hence, private arbitrageurs, besides aiming at potential price advantages, also factor in certain arbitrage costs when it comes to choice of a shopping location.

   Customers intuitively deduct these costs from the targeted profit based on price differences. Accordingly, existing price difference here reflect the maximum range of subjective transaction costs consumers can afford to spend in order to still being able to profit from cheaper prices abroad (total utility). Hence, the question whether customers actually exploit price differentials depends, besides the differences in real prices, to a large extent on subjective factors that, from a customer's point of view, have a significant effect on the total costs of a purchase.

   Of particular interest to economic studies when it comes to cross border shopping is to identify which factors and motives actually influence consumers shopping location choice and draw customers across the border or prevent them from engaging in cross border shopping (see e.g. Wang 2004, Dmitrovic/Vida 2007, and Moosmayer et al. 2010). A few years ago, a research project on this topic was started in Austria, especially by Hammer (still unpublished work) and Siems/Hammer (Moosmayer et al. 2010, Siems/Hammer 2011a, 2011b). In this research, the cross border shopping between Austria and Germany was investigated. The present paper is a sequel of this first research: We extended the existing research by a new empirical study and an enriched theoretical background: Using the example of the border region between The Netherlands, Belgium, and Germany (the Euregio-Meuse-Rhine), we will investigate, which factors and motives influence the cross border shopping behavior of consumers.

   The paper is structured as follows: First, potential drivers of consumer choice of shopping locations and cross border shopping are derived from the literature (Section 2). Following this, an in-depth, factor analytic observation of these influence variables on Cross Border Shopping behavior will be discussed in Sections 3 and 4. The paper ends with management implications and limitations (Section 5).

2. POTENTIAL DRIVERS OF CROSS BORDER SHOPPING

   Existing literature on outshopping and cross border shopping distinguishes between shopping area attributes and distinct consumer attitudes when it comes to consumers' choice of a shopping location. The most commonly used shopping area attributes that, besides the product price itself, have been included in past research on cross border shopping are: The availability of distinct products and brands, the variety of stores, product assortment, product...