François Fontaine*, Julien Martin and Isabelle Méjean
- This article was originally published in the April 2021 edition of the 5 papers…in 5 minutes.
To what extent producers sell the same product at different prices to different buyers? This question may look straightforward but it challenges the way economists understand how markets are functioning. In a competitive environment, the ability to vary prices across consumers is limited because buyers can switch from one seller to another if the price is too high. However, in practice, buyers only observe a limited number of sellers and price dispersion is pervasive empirically. In a way, price dispersion is an index of the producers’ “market power”.
In this article, François Fontaine, Julien Martin and Isabelle Méjean investigate that question by studying French custom data describing the business-to-business transactions of French exporters with their European clients, on 9000 intermediate products and over 2002-2016. Since they follow buyers and sellers over time, they can observe buyers changing business partners and sellers gaining and losing clients. The core of their work describes prices and their dynamics as a function of four main components. One captures the fact that some products are generally more expansive than others. A second that some sellers are generally cheaper than others because, for example, of better production technology or because they sell a slightly different variety within a product category. Another captures the heterogeneity on the buyer side, some buyers having strong preferences for some goods and being willing to pay more. Finally, the authors allow the price to vary with the age of the relationship between the seller and its client.
These results show the importance of “price discrimination”. The large price dispersion of the data comes from variety differences, but also from the fact that the analyzed exporters have very different margins from one customer to another. These margins are renegotiated downwards over time, along with the fact that the buyer acquires information about other exporters. Interestingly, large firms in terms of sales are especially good at charging new consumers high prices while suffering from relatively less pronounced downward price renegotiation. These results shed new lights on the origin of market power in the international markets.
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References
Original title of the article: Price discrimination within and across EMU markets: Evidence from French exporters
Published in: Journal of International Economics, Volume 124, May 2020, 103300
Available at: https://www.sciencedirect.com/science/article/pii/S0022199620300192
Credits (picture): Halfpoint – Shutterstock
* PSE member