Global corporations, price discrimination, and NZ

By Matt Nolan 22/05/2014

I see that there is a new paper out discussing the fact that both tradable and non-tradable prices in New Zealand are “high” relative to what people are paying around the rest of the world.  I am used to the argument about non-tradable prices being high RELATIVE to tradable prices, but the tradable price argument is a bit of a fun twist on it all.

Eric Crampton has summarised the results, and Patrick Nolan from the Productivity Commission has had a chat about it.  Update: Donal has a couple of posts here and here.

My intention was to argue with them, especially Patrick as he is my brother.  But everything they wrote, and what I’ve read of the paper, was entirely reasonable – so I’d suggest reading those yourself ;)

Instead I will “add value” by making an unsubstantiated claim that may ad hocly explain this from the paper:

Based on “adjusted” tradables prices that remove the cost share of non-tradables element, NZ tradables prices are around 6th highest in the 43 country OECD-Eurostat sample – behind such countries as Iceland, Norway and Japan (see Figure 6). These are also countries that are relatively distant from many of their key markets. However, Australia is ranked 19th out of 43 countries in its adjusted tradables price, suggesting that to the extent that there are “disadvantages of distance”, Australia manages partially to avoid or overcome these (see also McCann, 2009).

Like NZ, a number of other small countries have high adjusted tradables prices (e.g. Cyprus, Malta, Denmark, Finland, Israel), suggesting that size or other characteristics of domestic markets/populations may also be important, in ways not already accounted for by the model we
have tested.

So the price NZ is paying for goods overseas is high, and this isn’t fully explained by distance (read Australia – note this is separate to the idea that distance penalises exports).  It isn’t based on different good baskets, as the focus is on ‘similar goods’.  However, some other small countries experience it.  Indirect taxes are hinted at as a reason, as are “domestic markets/populations”.  But what does this mean – its sort of like playing mastermind!

Well it could be that trade processing in a country incurs large fixed costs and low variable costs (if we were to think about a port model) – and this could lead to a higher average cost of bringing in goods.  Same argument for the decision of global firms to sell goods in a country – we are just on the wrong side of economies of scale!  This is the point Eric is making with his post title I believe – although I didn’t see it explicitly come up in his post.

However, it could also be that large global firms are able to price discriminate between customer bases – and small open economies have properties that lead them to be discriminated against.

Let us try to make this argument.  Say there is a fixed cost of entry into a given market for a global firm, however the return they could make depends on the size of the customer base.  If there were two global firms selling a product, they may both pay the entry fee to compete in the large markets, while seeing the idea of selling in NZ as more marginal.  As a result of this lower competition between global firms, a small difference in the fixed costs of entry for firms could help to drive a wedge in prices.

That in itself doesn’t say much, but what happens if the difference in fixed costs was large – as some of the costs were “advertising” related, and certain brands were already well known.  Well in that case, we’d expect NZ to have lots of brand name products, few non-brand name substitutes, and due to the lack of effective competition NZ would have higher tradable prices – Apple, Google, Microsoft, Nike and Sony would all charge us more.

IF it was that (and not a shipping/fixed cost from scale of ports) issue, then internet retailing will help to solve it.

Anyway, wild conjecture, no data.  Go read the other things ;)