what's the deal with vastly different prices internationally?

Factual Questions
1

OK, I get economics as a whole - I studied economics here in the UK to A-level standard, and I like to think that I have some vague idea of how markets work, but one thing puzzles me - vastly differing prices between countries. Specifically, why do exchange rates seemingly bear so little relation to reality.

An example: the exchange rate of the UK pound sterling to the US dollar is around 1.7:1 (let’s not get anal about the exact figure), yet the prices of goods between the two countries seemingly ignore this figure completely.

An example: the 40GB iPod from Apple is $499 in the US and in the UK is £398.99. At current exchange rates, it should be £266 in the UK.

I accept if iPods are made in the US, eg international distribution costs might cause prices outside the US to be higher, but this cannot account for such a difference since a year’s supple of iPods could comfortably fit on a single container ship. Another example: It is actually cheaper to buy some British cars in the US in US dollars than it is to buy them in UK pounds in the country where they were made (the UK), if you take the official exchange rate.

I could continue with hundreds of examples. So, what’s going on? Is it:

A) As some proponents will tell you, Britain and other countries are being “ripped off” by manufacturers who have discovered that Brits are willing to pay vastly more than Yanks - 50% more in the case of the iPod.

B) The official exchange rates are meaningless for anything other than money transfers, and some other “secret” exchange rate works for export businesses and sale of goods.

C) or something else.

Post up your responses

Dan

2

In the case of iPods, there may be tarrifs imposed that raise the price up. There could also be localization costs: adapting the documentation and other things to fit overseas markets. It could also be that iPod is the only product of its kind available in Britain, while several competitors are available in the US, in which case the retail price mat be higher simply because people are willing to pay it.

In the case of British cars being cheaper in the US, the higher British price is probably the result of higher taxes and extra fees that aren’t imposed in the States.

These are just guesses off the top of my head, mind you.

3

Although there is some evidence that there is a rip-off Britain culture amongst retailers, much of the explanantion is in fluctuating exchange rates and taxes.

Currently the dollar is at 1.70-1.80 to the pound but in recent years it has hovered around 1.50. Long term marketing may have suggested that the price that the public would bear in the UK was ‘under £400’ and that this decision was made a couple of years ago. They stuck with it and took the profit, making the equivalent of the US price before tax as $499 / 1.5 = £333. Add in Value Added Tax (always included in the headline price in the UK (unlike sales tax which is excluded in the US) and you get £333 x 1.175 = £391.

It looks to me like they decided that the US market would bear up to $500 before state taxes, the UK market would bear up to £400 after VAT. Even though the exchange rate has changed, a price had been set and they will only retreat from that price if forced to to buoy up the market. Very few prices for electronics are based on cost plus- only on what the market will bear.

Cars are even stranger- there is car duty and then VAT is applied to the cost price and duty.

4

One important thing to recognise is that the UK is a smaller market than the US, and the dealers need to increase their margins so that they can afford to drive around in fancy cars.

I believe that it’s changing in the right directionm, however, with the adventof the EU. I used to live in Sweden, and I’ve seen how prices for a lot of electronical gadget used to be elevated by the local representatives of all the big brands. Now since we joined the EU, prices have actually come down. (Since you can order the same thing from the German or French importer european prices tend to equalise.)

It also depends a bit on where you’re looking. Are you sure that you’re not comparing apples and oranges by comparing a cheap internet US vendor with UK high-street shops? Also, don’t forget that the UK price you see almost always included that VAT.

If you look at amazon.co.uk they have the 20Gb ipod for GBP259, whereas at amazon.com it costs USD399 (= GBP 235) - not that steep a markup - especially once you deduct the UK VAT - although I can’t remember right now how much it is.)

5

Certainly the overall UK market is but I’m guessing that the catchment area of each UK store is the same as or greater than that of a US store, given relative population densities and the continuing UK situation of a single highstreet centre with perhaps one out of town shopping centre, compared to (my experience of) the US, where each district has its own mall or malls.

I am comparing like for like - RRP with RRP.
[/quote]

UK vat is 17.5%

Dan

6

As I said in my original post, I accept such things exist, but they do not exist at a level that would cause a 50% price increase.

Not true, there are, I would suggest, more alternatives here, both US-market and Japanese-market offerings.

There are indeed such taxes, but not at a differential level compared to US import duties and taxes to account for the price differences.

Dan

7

Thanks, this seems like the most plausible explanation to me. The “mystery” exchange rate used is thus a historic or long term rate.

Dan

Dan

8

The UK imposes a massive consumption tax (VAT), which probably accounts for much of the difference. Plus rents and other retailers’ overheads are higher. Plus the US is a huge market, so there are probably economies of scale there. Other forms of tax probably come into it. The UK has a “free” health care system and a more generous welfare system than the US. The Brits’ have to pay for that “free” bit somehow. Also, the Brits take more vacation time than people in the US. The difference has to come from somewhere … blam - your iPod costs more. At the end of the day it balances out, or there’s a big opportunity in buying them in the US and selling them in the UK.

9

See, the fact that online retailers buying “grey imports” of goods from Europe and the US CAN sell them cheaper in the UK suggests that either the “ripoff Britain” or “pre-fixed prices at old exchange rates” explanations is the correct one.

If the costs were higher full-stop, there would not be cheaper alternatives from other sources.

As a foot note, it seems to me this must damage the UK economy - I now buy almost everything online from the US and the (European) continent.

Dan

10

In which case, why is it, I was able to walk into a Gap clothing store in the US, and see t-shirts/trousers/skirts at prices in US$, that I would pay in GB£ in the UK. Surely there’s no localisation costs, or trying to make things fit overseas markets when it comes to clothes. Not even the tags.

11

To add another anecdote to this thread, I am looking around to get a new Sony memory duo card for my camera. Amazon uk offer me one at just over £70. The same unit costs just over $70 at Amazon us. Searching on ebay uk yields results almost excusively from vendors willing to ship from the US. I should be able to pick one up there for around £45 + £6 shipping. Interestingly, they all guarantee to refund any import or VAT duties should these be incurred. I assume this is because they experience very few cases of such charges being levvied.

I would not be happy at the tilt of the playing field if I was a uk based sony dealer.

12

Yes there is localization with clothes. In the EU, clothing manufacturers are (were?) not required to put the country of origin of the item, like they were in the US. If you walk into an H&M in Oxford Street, you won’t see “Made in Turkey” while you will see that in the H&M in NYC. So H&M has to have 2 sets of labels for the same product. Also, European clothes are cut much closer on the sides than US ones are. I am 5’ 10" and weigh 185 lbs. I have a small belly, but am in not way “fat”. European clothes always tend to fit my OK front to back (where the fat is) but not on the sides.

I do believe that there is an element of “what the market will bear” in pricing for most items. While we are comparing 2 wealthy nations, it’s easier to see this with the price of movie tickets worldwide. It costs around $8 to see a non-matinee movie in my area (Charlotte, NC). I thererfore would only have to work around 15-20 minutes to pay for a ticket. Someone in Thailand or India would have to work several days (maybe even weeks!) to pay that kind of money for a ticket. Therefore, going to the movies in those countries costs a lot less than it would in a first-world country - although it still probably costs more as a percentage of their incomes than it does here.

Same thing with pharmaceuticals - even without government intervention or insurance, it’s highly unlikely that anyone in Malaysia could afford to pay $200/month for a drug. Although the drug companies would love to charge Malaysians what they charge Americans they figure that some sales are better than no sales and price accordingly.

13

checks skirt (from Gap). Well, it seems that I have on here country of manufacture, as well as UK, US, and Canadian sizes. And I bought this in the UK. And stuff I’ve bought in the US from Gap have labels that are identical. And I found no difference whatsoever in the cuts of the clothes either.

Sorry, but firstly, I think that there’s very little localisation when it comes to clothes. And secondly, you’re telling me that sewing in different tags requires a 70% markup? Please.

14

Think I can tackle this one. There is no such thing as either an official or secret exchange rate for a freely floating currency pair such as GBP/USD (called ‘Cable’ in the markets). The rate printed in the newspaper, typically yesterday’s closing rate (end of the business day for wherever the paper is published), is simply a reflection of where the market was trading at. As you’ve studied economics I won’t touch on market theory other than to say that the price reflects the sum total of interests of buyers and sellers at any one time.

Importers, who buy foreign currencies to pay for overseas goods and Exporters, who sell foreign currencies to repatriate overseas earnings are active participants in the currency markets. Like everyone else, when they need to trade, they trade at prevailing market rates - there is no secret secondary market because FX markets are so liquid and efficient.

Naturally long-term business planning requires budgeting, which in turn must accomodate fluctuating exchange rates. Some international corporations have very sophisticated treasury departments that attempt to predict how currency prices will change, ‘hedge’ their exposure (current and future) and even actively speculate in the markets. Conversely, a small business may look at the current exchange rate, plug that into their budgets and hope the price doesn’t move against them over the period of their budget - a bit like us budgeting for our next overseas vacation.

Overall though, I think your product, an iPod, is not a good example for comparing relative prices and exchange rates. Because it is effectively a niche, luxury item there are going to be significant local market factors influencing the price that will probably outweigh the exchange rate pressures (some of these have been touched upon above). One comparative tool that economists like to use is the so called ‘Big Mac Index’, which itself is a form of the Purchasing Power Parity model. Because fast food hamburgers are such a highly commodotized, low-margin product it is assumed that the price of a Big Mac should be at an optimum level for the local market in any country. If the relative price between Big Macs in London and New York differ significantly from the current Cable exchange rate this indicates strain in the relative markets that ulitimately should lead to convergence.

15

Exchange rates and taxes are the main reason I think.

Back in the 80’s (here in NZ) electronic equipment was taxed so much that it was cheaper to go on holiday to Aus and buy a stereo then it was to buy one here and airfares wern’t cheap then.

Sometime in the late 80’s I bought my brother a leather jacket in London for 100 pounds and posted it to him. It cost him $150 dollars in duty at the NZ end (about 50 pounds).

16

Let’s get picky with the details. The current exchange rate is 1.8709. So 398.99 pounds is equivalent to $746.47. The sales tax in the U.S. varies from state to state but is generally about 5% (which is not included in the amount shown), while the VAT in the U.K. is 17.5% (which is included in the amount shown). If we figure the amounts paid with tax then, an American will be paying about $523.95, while a Brit will be paying $746.47 which is about 42% higher. If we figure the amounts paid without tax, an American will be paying $499, while a Brit will be paying about $635.29, which is about 27% higher.

Two and a half years ago, the exchange rate was around 1.42. At that point 398.99 pounds were equivalent to about $566.57. So with tax, an American (if the prices were the same then) would be paying $523.95, which would mean the Brit was paying about 8% more. Without tax, the Brit would have been paying $482.18, which is actually about 8% lower. (Admittedly, the relative prices were probably not the same two and a half years ago, so this is probably not a good computation. Does anyone have the prices from two and a half years ago?)

Going back to the current exchange rate, it’s an exaggeration to say that Brits are paying 50% more. Even when the exchange rate is high, as it is now, without tax the Brits are paying 25% to 30% more. What one gets from these taxes is an entirely different matter, so let’s please not discuss that. I lived in the U.K. in the late 1980’s, so this isn’t new. My rule of thumb then was that the price for everything (even if I factored in the difference in tax rates) was about 20% more. This isn’t anything new then but has been true for a long time. For at least the last 20 years, the prices for things in the U.K. has been about 20% higher than the prices in the U.S., using the prices without the sales tax or VAT.

17

AFAIK, PPP is the main tool for understanding what is going on. The idea is that stuff should cost about the same when exchange rates are taken into account. E.g., when I was in Wales, a meal that would cost about eight bucks in the States was about five pound and change, with the exchange rate being about $1.50 for every pound I bought. I spent about eight bucks to get five pounds and change, and spent five pounds and change to get a meal worth about eight bucks.

Is this perfect? No, but it should be a good conceptual framwork on which one adds such complicatons & noise as taxes and tariffs.

For more:

18

First you say “no localization costs”, now you say “very little localization costs”. Which one is it? Perhaps the Gap includes the country of origin tags because they’re an American company that’s always done it that way. After all, there’s no law that says they don’t have to include that information in the EU. And after looking at all the clothes I’ve bought in the UK on my past two trips - in 2001 and 2003 - and the only ones that have a country of origin are the “3 for £10” t-shirts and a scarf. And yes, clothes are cut differently in different countries - buy an XL shirt in Thailand if you don’t believe me. Or ask any fashion designer. I also didn’t say that was the only reason.

“Please” :rolleyes:

19

It’s also a mistake to assume that the cost of products in brick-and-mortar outlets will correspond well to the marginal cost of the product as reflected in the exchange rate. The fixed cost (Rents, utilities, licenses, bribes, labor) of a retail outlet are significant [else you could simply start your own store, and buy wholesale, couldn’t you?, highly localized even within a specific region (upscale downtown vs. suburban vs. rural strip mall) and not at all comparable to overseas internet operations, some of which drop-shipp from a distributor warehouse, and are little more than order-taking operations.

All that is standard economics. What is sometimes lost in the shuffle is: every piddling object used in the operation of the store is subject to the same sort of “UK tax” that you’re (and my UK friends) complaining of, from the giant bulbs in the fixtures to the barcode scanners – even if the product is made locally. A British bulb manufacturer will ask what the competing French or American (or British) product costs, weigh benefits and quality, and price accordingly. “Marginal cost + X%” doesn’t enter into it (unless X is too low to be appealing)

IMHO, almost all product prices come down to competition. That’s hardly a revelation, yet I constantly hear (in daily life) analyses that pretend prices hinge (or should hinge) on “cost+X%”, which results in countless paradoxes, all of which, all too often devolve into rants about 9e.g.) how the system is “fixed”.

There’s also a "hassle factor.’ Many companues, especially initially, consider overseas sales to be a hassle - shipping, taxes, customs, legal uncertainties like local liability laws, fraud, local packaging and quality requirements, currency fluctuations for items priced in overseas units, etc. – all subject to change at the whim of an ‘unknown’ foreign government or international events. It doesn’t matter if those hassles and costs are significant or even correct. All that matters is the perception in the eyes of the seller – i.e. how much profit it’d take to make them undertake the percieved risk.

You might say “That’s not a hassle, that’s their business!” Yes, but it’s still up to them how much markup they feel makes it worthwhile to add overseas business - your purchases aren’t any more expensive because a couple of yahoos in East Dakota, USA want a $100 premium for ‘all that hassle’ when it’s actually minimal. You can find some outrageous price on almost any item, in almost any market. You simply don’t buy from those sellers, so who cares?

It works in reverse too: a buyer can usually find far better prices on the internet than in their local market (eliminating much of the OPs complaint) but they often prefer the convenience of the B+M: the ability to try on jeans, ease of return without international postage, etc. These factors often parallel the risks and hassles that the seller would undertake. Many buyers want sellers to undertake the hassle for them (as well as hassles that wouldn’t apply to a buyer), at a price comparable to a domestic sale without the hassles

There’s a lot of “should” in economics. Actually, there’s very little ‘should’ in the operation of the market, it’s all in the discussions.

It all comes down to: why would a UK seller charge less than they do? If a competing seller could easily offer lower prices, it’d be a tremendous business opportunity - but I think you intuit that it’d be “more hassle than it was worth”. Clearly, that isn’t happening locally, and overseas sellers apparently aren’t strenuous enough competition, due to buyer preferences.

We can change that balkance ourselves. Buy on the Internet. I have UK friends who get a significant fraction of their purchases, even nonperishable staple goods, from US websites, and a major fraction of my US purchases are on the web, not local. If the difference in cost and hassle is truly insufficient to justify the price differential, do an end run about it. Importing the goods yourself (e.g. buy on Amazon.com or amazon.ca rather than amazon.uk) Don’t wait for someone to offer you that product at some price they’d be happier for you to pay

20

many US sites DON’T sell overseas. I’d love to buy stuff at US prices but most of the stuff I find can’t be sent to me. I need to find an American penpal I think…
I did used to buy my CD’s from Amazon.com for ages, as even when P+P was included, CD’s were still significantly cheaper. There’s a high street price war going on the moment on CD’s so I don’t need to anymore.