How is it that retail prices differ within the EU?

Current issues related to economy, (responsible) investment, pension and income: every week an APG expert gives a clear answer to the question of the week. This time: chief economist Thijs Knaap on how it is that some products are sometimes more expensive in the Netherlands than in neighboring countries.

Consumers who buy a bottle of Coca-Cola in a Dutch supermarket pay 50 cents more for it than in a German supermarket. This is due to purchasing restrictions faced by wholesalers in the Netherlands. Research commissioned by the Ministry of Economic Affairs and Climate shows that this makes 1 in 25 items in Dutch supermarkets more expensive than necessary; about 10 percent on average, even though the European Union has free movement of goods. Why is that?

Internal market
Dutch people who live near the German border have been aware of it for some time: it pays to shop across the border, Knaap said. “But why can’t Dutch supermarkets offer the same prices? They are different countries with different rules. For example, VAT is 19 percent for our eastern neighbors and 21 percent for us. But otherwise, you wouldn’t expect a difference. After all, trucks with goods can cross the border without obstacles.” However, manufacturers make it difficult or even impossible for supermarkets to purchase products abroad. This leads to higher purchase prices, especially in smaller EU member states such as the Netherlands, where there is less competition.

Even though the vast majority of goods are freely tradable, the existence of this import restriction is still striking news, Knaap continues. “Especially in light of the free movement of goods, which is, after all, one of the four freedoms of the EU and an integral part of the internal market. The European Commission has tracked price differences between member states in the Single Market Scoreboard since 1996. Those differences mostly decreased between the late 1990s and early this century, when the internal market gained momentum. Since 2008, though, the stretch seems to be largely gone.” Prices in the EU will never be completely equal, the APG economist says. “Just think of oranges, which are cheaper in Spain than here. That has not only to do with the purchase price of the supermarket, but simply also with the fact that they grow in Spain and not here.” It is true, however, that price differences within the euro zone are smaller than between countries that are in the EU but do not have the euro. “We often talk about the disadvantages of the euro, but here the currency union has a clear advantage. There is relatively high trade between euro countries. That helps to bring prices closer together.”    

German label
In theory, there is free movement of goods, which may be sold anywhere. On that basis, one would expect buyers to have the freedom to buy where prices are lowest. “That should encourage manufacturers to offer their products as cheaply as possible. However, this does not help manufacturers, and so they sometimes refuse to supply a product to a foreign supermarket. One reason they give, for example, is that they are not allowed to sell a product to a Dutch supermarket or drugstore because it has a German label.”

This practice appears difficult to tackle unless a major undercover operation is set up. If there were a cartel, it would be punishable, but it is difficult to prove such a thing, Knaap continues. “Moreover, only a small proportion of products are involved, so this problem will not be at the top of the European Commission’s priority list.” Still, it is good to keep an eye on these kinds of trade practices, because there is always an incentive for producers to charge the highest price possible.” 

Solutions
The ministry's research report also identifies potential solutions. "One of them is a label with a QR code on it, instead of a list of ingredients. If you scan that code, you get to see the ingredients on your cell phone in the local language. The Dutch consumer is not entirely defenseless, either. If they live near the border, it pays to shop across the border. In addition, you can order more and more over the Internet. Of course, that pays off especially for larger items, but what would stop you from ordering a year's supply of peanut butter from Germany online? After all, there are online stores that deliver groceries across the border. The question is whether this is a solution, though, since it puts further pressure on the already low profit margins of Dutch supermarkets."

Even if the free movement of goods is not yet working perfectly, the news about price differences does demonstrate the economic achievements of the EU, Knaap concludes. "Namely, that life really does get cheaper when you remove trade barriers. Whereas the free movement of people can lead to bigger problems, such as housing shortages or people feeling displaced in their own countries, the free movement of goods has virtually no adverse effects. Or it must be the carbon emissions from transporting the goods. Apart from that, the prosperity-enhancing freedom of movement of goods is to be commended.”