The European price corridor between Salzburg (Austria) and Freilassing (Germany): theory and empirical results.

• Author: Siems, Florian

1. RESEARCH FOCUS: THE EUROPEAN PRICE CORRIDOR AND CROSS-BORDER SHOPPING

   Internationalization and the nuances of international price management today impact an increasing amount of companies from all kinds of industries. A central issue of international price management is whether it's worthwhile to pursue the same pricing world-wide/Europe-wide (price harmony), or whether price management should be practiced individually with different prices found in each country (country-specific price differentiation) (see e.g. Belz 1997; Kopka/Rickert 2006, 56; Herr/Buchwald/ Wegener 2007, 202; Cansier 2008, 246; Siems 2009, 349).

   A country-specific price differentiation (along with the opportunity to differentiate on the regional, city, and district level) represents a special case of spatial differentiation (and is also referred to as "geographical pricing") (see e.g. Armstrong/Kotler 2007, 284; Homburg/Kuester/Krohmer 2009, 183; Siems 2009, pp. 192). From a company perspective, a variety of economic reasons speak in favor of a country-specific price differentiation, which include maximizing customers' willingness to pay, and other, indirectly economical aspects such as the psychological effects of price perception (Siems 2009, 349).

   Cost structures can vary from country to country based on a number of factors (e.g. wages, raw materials prices, real estate prices, etc.; Lenze 2006, pp. 115; Raupp 2006, 34). Even with a non-cost-based price determination, these can still have an effect on minimum prices (Siems 2009, 349). And this is also the case for other market strategies: For example, in the case of exports, the exporting country can experience additional costs such as those for transport, customs, etc. (Kotler et al. 2007, 824) that have to at least be compensated for through the prices of the products sold.

   At the same time, these kinds of costs are also accompanied by additional, often country-specific price elements such as sales tax which varies from country to country (Siems 2009, 349). So even if production costs are identical, and prices are determined solely based upon them, the different tax rates in each country will still lead to different consumer prices and a country-specific differentiation.

   Differentiation can also be the result of country-specific parameters of the competition, or due to channels of distribution, e.g. country-specific trade structures for consumer goods (Siems 2009, 349). Many market elements as a result differ from the markets of the country a product comes from, which also has to be factored in when determining prices.

   But the main reason for a country-specific price differentiation is often found with the differences among the consumers, who in some cases can have the greatest impact on the entire price management system (Siems 2009, pp. 349):

   * Depending on the country, customer willingness to pay--and as a result the price-demand-function--can vary (Herr/Buchwald/Wegener 2007, 198; Diller 2008, 300). A country-specific price differentiation allows these differences to be taken into account, thereby increasing profits.

   * Depending on the country, the conditions that accompany price (e.g. payment and delivery terms) can have a varying level of value depending on the customers. In this case, the best idea could be to configure these conditions from country to country (Meffert/Althans 1982, pp. 181).

   * The psychological price effects of price management can also be country-specific depending on the respective nation and its traditions, history, or culture. For example, in some countries, bargaining about a price, or receiving a discount, are automatically expected by customers. Their absence would lead to unsatisfied customers in some countries, but not in others (Siems 2009, 350).

   So there are plenty of arguments in favor of a country-specific price differentiation. But different effects may hinder its progress nevertheless.

   Market interdependencies may exist between geographically divided markets (here, this means either countries or economic realms, which as shown above can each have their own country-specific price management) that go unnoticed by a company working within several of these markets (Siems 2009, 350). These interdependencies can create an opportunity for customers to arbitrarily work their way through existing geographical price differentiations to their own advantage (Siems 2009, 350; also see Diller 2008, 301). From the company's perspective, "market disturbances" occur here that disrupt the existing price differentiation system (Pepels 2006; Siems 2009, 351).

   Typical market interdependencies include (see e.g. Diller 2008, 301; Sander 2002, 442; pp. Muhlbacher/Leihs/Dahringer 2006, 664; Pepels 2006, 116):

   * Re-imports (products/services exported from a higher-priced domestic market to a lower-priced market abroad are brought back to the home country and sold and consumed there below the standard domestic prices).

   * Parallel imports (products/services that are to be exported from a lower-priced domestic market to a higher-priced foreign market are (illegally) bought up inside the home country and exported abroad. There, they are sold below their originally intended international price).

   * Lateral grey markets (products/services exported from a higher-priced domestic market to a lower-priced foreign market are sent to another higher-priced country. There, they are sold and consumed below their originally intended price for that country).

   Over the past ten years, the lifting of trade barriers, the introduction of a European domestic market, and the creation of the European Economic and Monetary Union in 1999 have led to increasing problems with the market interdependencies just discussed. This is due to the fact that prices and services in Europe have become increasingly similar, and imports and exports have gotten easier. And this trend has profited from the efforts of the European Union to achieve a unified tax system, and structural reforms among the European goods market with the aim of promoting competition and limiting state regulation. This unification of the European market had as a result a pressure on prices among the European goods and services market, which ultimately led to less price variation, most notably among the goods market (Sosvilla-Rivero/Gil-Pareja 2004). On top of this, ongoing European integration has led to more similar prices for identical goods and services; this pattern continues as more and more nations are allowed into the EU (Dreger/Kholodilin 2007, 557; also see Cansier 2008, 247) and is expected to remain along the same pathway as the EU expands even further.

   A few years ago, a theory was developed in light of these events which continues to be discussed today. It states that in spite of these effects, Europe-wide standard prices are not plausible. To be sure, prices will become more and more similar. However, there will always be certain price differences between countries (Price corridors, for a background, see especially Simon 1992, pp. 476 and Simon/Fassnacht 2009, pp. 551; also see Simon/Lauszus/Kneller 1998; Kalka/Lauszus 1997; Keegan/Schlegelmilch/Stottinger 2002, pp. 453; Kopka/Rickert 2006, 57; Pepels 2006, 116; Cansier 2008; Diller 2008, 433; Hollensen 2008, pp. 344; Siems 2009, pp. 353).

   A price corridor is generally understood as the existence or setting of maximum and minimum price limits for a price differentiation (Simon 1992, pp. 476; Siems 2009, pp. 353; for similar, see Pepels 2006, 116; Diller 2008, 433). With the problem of arbitrary international price differentiation described above, this means that the price variance between individual countries ("corridor width") should be set in such a way that the difference between the country-specific prices is only so much that buying the same product in another country is not worth the effort for a customer or distributor. Based on the effects that influence market interdependencies (shown above), the width of what would be an enforceable corridor depends among other things upon the relation between what additional effort ("cost") is incurred by the customer to obtain the product/service in another (cheaper) country and what he/she actually saves by paying this particular lower price (for more, see e.g. Siems 2009, pp. 353; Simon/Fassnacht 2009, pp. 551).

   In Europe, the price corridor theory has been discussed with particular intensity, especially in light of recent economic developments. These include the introduction of the euro (and with it the elimination of price intransparency, currency uncertainty, etc. for the consumer) as well as the lifting of trade barriers between different European countries (Simon/Lauszus/Kneller 1998; Kalka/Lauszus 1997; Lauszus 1998; Keegan/Schlegelmilch/Stottinger 2002, 440 u. pp. 453; Kopka/Rickert 2006).

   The four scenarios shown in Figure 1 are perceivable in light of the common currency of the euro and the increasing expansion of the European economic realm.

   Different explanations are available for the scenarios depicted (Kalka/Lauszus 1997, pp. 22; Simon/Lauszus/Kneller 1998; Hollensen 2003, 508; Hollensen 2008, pp. 344; Figure by Siems 2009, 354):

   * Scenario 1 : It might occur that, e.g. due to a high amount of grey imports, prices in all countries start to resemble those in the countries with the lowest prices. Economics literature speaks here (at least from a company's perspective) of a "horror scenario" (Kalka/Lauszus 1997, pp. 22; Simon/Lauszus/Kneller 1998).

   * Scenario 2: It's also possible that prices in all countries could reach the price level of the countries with the highest prices, e.g. when companies raise their prices across the board in Europe to avoid Scenario 1. The danger exists here of losing customers in the countries who until this point had low prices, because their willingness to pay might be lower than the new prices now being charged.

   * Scenario 3: In the case...