No announcement yet.

Ikea Index Indicates the Euro Is Not a Price Equalizer Yet

  • Filter
  • Time
  • Show
Clear All
new posts

  • Ikea Index Indicates the Euro Is Not a Price Equalizer Yet

    MILAN, Oct. 22 - That a storage chest sold by the Swedish home furnishing giant Ikea costs 59 percent more in Austria than in the United States is perhaps not surprising, considering the countries are on different continents and have different currencies, taxes, inflation, labor laws and interest rates.

    But that the same Moppe storage chest is 39 percent more expensive in Austria than in Germany, countries that share a border and a currency, is an indication that the introduction of the euro has yet to succeed in one of its basic missions: to create a single, transparent market where identical goods cost the same everywhere.

    Just how elusive this goal has been was highlighted by some recently published research by Gabriel Thulin, a Swedish statistician.

    Mr. Thulin, whose fellow Swedes voted overwhelmingly last month against membership in the European single currency, works for the financial communications consulting firm of Hallvarsson & Halvarsson. He conducted his research on his own time.

    Following the lead of the Big Mac index, a comparison of the price of the McDonald's sandwich around the world that is published by The Economist, Mr. Thulin constructed the IKEA index, which compares a basket of 26 Ikea products, including the Moppe storage chest, across 15 countries: 8 in the euro zone, 3 non-euro European Union countries, 2 European countries not in the union, the United States and Canada.

    According to the report, consumers in the United States pay the least for Ikea products, and those in Finland, a euro country, pay the most. Among euro countries in the survey, people in the Netherlands pay the least for the full hypothetical basket - 17 percent less than in Finland.

    The cost and time involved in buying a bookcase in Germany and transporting it to Belgium will more than cancel out any potential savings for most consumers. So Ikea can still charge Belgians 33 percent more than Germans for the Billy bookcase, even though both are euro countries and there is a German Ikea store near the Belgian border.

    Ikea, like many multinational companies, is also able to charge different prices in different countries because the company is adept at exploiting local market conditions, experts say. For example, here in Italy, the fourth-most-expensive Ikea country in the index, the local competition tends to be from smaller high-end furniture stores rather than large retailers as in the United States.

    "At the end of the day it is a question of supply and demand, and prices will be higher where there is more demand," said Lorenzo Codogno, co-head of European economic research at the Bank of America in London. "There has been some convergence thanks to the euro, but not as much as initially expected."

    Price convergence is not the only aspect of monetary integration that did not develop as quickly as expected, Mr. Codogno said. Trade between countries in the euro zone has grown since the introduction of the common currency, he said, but not by as much as policy makers had expected.

    Ikea also capitalizes on its brand name by charging more where the brand is strongest, Mr. Thulin said.

    According to Marianne Barner, Ikea's communications manager, "Each country sets its own prices, which depend on competition, wages and taxes."

    "Our philosophy is to have the lowest price on comparable products in every country, compared with our competitors," she added.

    While the United States is the cheapest Ikea country over all, some products in the survey are cheaper in Europe. For instance, though Finland is the most expensive country for the full basket of Ikea goods in Mr. Thulin's index, one item, the Sultan Skymning mattress, is 42 percent less expensive there than in the United States. This indicates that high local costs - like taxes, wages or advertising - are not the only reason for the price differentials, because if that were the case, the cost of all products would be higher in a higher-cost market.

    "In due time something will have to give and there will be a trend toward having similar prices in all euro countries, but many factors that make price discrimination possible are destined to remain," said Fabrizio Onida, an economics professor at Bocconi University in Milan. "As long as there are differences between national markets, then price discrimination is possible."

    If the differences in pricing eventually disappear, it will be as much because of the Internet as from the introduction of the euro, because just as a Californian can go online to compare the price of a golf club sold in Nevada and New York, an Italian can see if a new stereo would cost less in Germany or France.

    In fact, while the privately owned Ikea printed 131 million copies of the current catalog in 23 languages, it was the company's decision to put an increasing number of prices online that allowed Mr. Thulin to develop his index.

    "The idea for the index was born five years ago, but when I tried to develop it back then it was impossible to get all the catalogs," Mr. Thulin said in a phone conversation from his office in Stockholm. "Prices weren't on the Internet and I couldn't get the catalogs sent to me from some countries."

    He added that "eventually it became inevitable to have prices online. '' Ikea has 186 stores in 31 countries, but the company will send online purchases to only 9 countries. And customers cannot buy from one nation's Ikea Web site and have the product sent to a different country, or receive a catalog for one country at an address in another.

    When calculating his index, Mr. Thulin used Oct. 14 exchange rates. But the catalog's prices, guaranteed until July 2004, were set when the dollar was stronger relative to the euro, and the dollar's recent fall in value played a role in making the United States the cheapest Ikea country in the survey.

    Mr. Thulin said he chose Ikea for his study because, among other things, the store has many products that are exactly the same in every market; the goods are not perishable so they can, in theory, be easily transported from one country to another; and the goods for all countries are all made in the same factories so production costs are the same.

    He also said he was planning to repeat the index next year, so it may be possible to see whether, at least according to some home furnishings, the single currency is leading to an alignment of prices in euro land.

  • #2
    Closing in steadily.

    "Some have learnt many Tricks of sly Evasion, Instead of Truth they use Equivocation, And eke it out with mental Reservation, Which is to good Men an Abomination."

    I don't have to attend every argument I'm invited to.