(Mis)measuring prices in an era of globalisation
David Byrne, Brian Kovak, Ryan Michaels 03 April 2014
When the law of one price is violated it can be difficult to determine a product’s contribution to the CPI. Does a low price competitor discount also on quality, or are market frictions at play? This column examines key product characteristics to separately identify these effects. Chinese firms discount both on price and quality, while Taiwanese firms use their productivity advantage to dynamically take advantage of market frictions.
China’s integration into world markets over the past 35 years has been dramatic both in pace and scope. An important aspect of this growth has been China’s expansion into relatively sophisticated product categories (Rodrik 2006, Schott 2008). In such cases one wonders whether the lower prices offered by Chinese firms reflect true discounts, or rather lower product quality (Schott 2008).
imperfect competition, switching costs
Switching costs and competition in retirement investment
Fernando Luco 10 February 2014
Switching costs impede competition by making it costly for consumers to switch among products. This column studies the Chilean retirement investment market in order to identify the different causes of switching costs. The results indicate that most of consumer inertia is explained by the cost of analysing product information. This suggests that policymakers concerned about switching costs should focus their efforts on improving consumers’ access to information in order to minimise price distortions and increase consumer welfare.
Switching costs deter consumers from switching to alternative products and often result in high prices. As a result, they have become a concern for policymakers who worry about how well markets perform. Examples of markets in which switching costs play a significant role include health insurance (Handel 2013, Nosal 2012) and pay TV (Shcherbakov 2013). In practice, it is difficult to implement specific policies to reduce the impact of switching costs on competition, prices, and welfare, as switching costs arise due to multiple reasons (Klemperer 1995).
imperfect competition, switching costs, insurance markets