ROBERT PAISLEY

A European Commission survey published in July suggested that Britain still has the costliest new cars in the EU. Figure 1 (on page 7) shows that many popular models such as the VW Golf, Peugeot 306 and Ford Mondeo cost 20 to 30 per cent more in the UK, despite the relatively high value of the pound in relation to the euro. In some cases the differences were even greater. The British-made Rover 214 was 61 per cent more expensive in Britain than in France. The Honda Civic, also produced in Britain, was 80 per cent more expensive in Denmark than in Britain. Sixty-two of the 75 best-selling models cost more in the UK than in any other EU country.

The survey suggested that the gap between Britain and the rest of the EU widened over the last six months. The survey's findings have added to the pressure on car manufacturers to cut prices in the UK. Car prices are currently under investigation by the Competition Commission (formerly the Monopolies and Mergers Commission - see below). The recent widening in the gap between car prices in the UK and other EU countries is partly explained by the effect of exchange rate differences between the UK and the 11 members of EMU (the single currency). The introduction of the single currency has encouraged the erosion of price differences between its members, as price comparisons have become easier. The strength of sterling has amplified differentials between the UK and EMU members. Between November 1998 and May 1999 the gap between Britain and the cheapest EU country selling the Ford Fiesta widened by 6.7 per cent. The price of the Escort Finesse fell by 6.6 per cent in sterling terms between 1995 and 1998, but its price in Euros has increased by 18 per cent in the same period. Ford claims that its list prices in the UK have risen by less than the RPI since 1996, but the value of the pound has risen by 25 per cent. Rover has also been particularly hit by the strength of sterling and has pressed for the UK to join EMU as soon as possible.

Tax differences provide another reason for the differences between UK and other EU car prices. New vehicle taxation varies from 17.5 per cent in the UK to 21.3 per cent in Denmark. In the executive car category, the European Commission suggested that although Britain had the highest pre-tax prices, UK consumers paid less than those in Denmark, Greece, Ireland, Portugal and Greece when tax is included. Ford's response to the Competition Commission's investigation suggested that car manufacturers keep pre-tax prices low in high-tax countries to remain competitive. This policy could also be interpreted as manufacturers charging what the market will bear in lower-tax countries.

In the UK,there is considerable evidence that manufacturers are acting to restrict competition, and that this is also a significant factor in the differences in price between Britain and other EU countries. Continuing concern about car prices in the UK prompted the Competition Commission's investigation. The Commission held an open hearing in July 1999, which the car manufacturers refused to attend individually, but sent a representative of their trade association, the Society of Motor Manufacturers and Traders (SMMT).

The Competition Commission issued its provisional findings in July, concluding that a complex monopoly exists in that at least a quarter of new cars supplied in the UK are supplied by a group of manufacturers and importers who 'prevent, restrict or distort competition'. The Commission issues its final report in December, when it will recommend action to the Secretary of State for Trade and Industry. The Commission is particularly concerned about Selective and Exclusive Distribution (SED). The SED system involves car manufacturers giving dealers exclusive rights to sell cars from a specific manufacturer in a particular part of Britain. As a result, car manufacturers decide who can sell their vehicles, in what area and at what price.

Restriction of competition would normally be against both UK and EU rules, but the SED system is reinforced by the EU Block Exemption. This exempts the car industry from EU competition rules, which prohibit producers fixing price and restricting quantity supplied. The exemption was introduced on the grounds that it would ensure a better after-sales service. However, the exemption expires in 2002 and, given the Competition Commission's provisional findings, it is highly possible that it could demand an immediate end to the Block Exemption.

The Consumers' Association argues that the manufacturers' control over the distribution chain distorts competition and enables the manufacturers to operate a price-discriminating monopoly. A higher pre-tax price is charged in the UK, and the excess revenue is used to offset lower pre-tax prices in high-tax countries. Private buyers in the UK also subsidise fleet sales, which account for more than 75 per cent of new car sales. Fleet buyers are given discounts of up to 55 per cent in the knowledge that the private market will bear higher prices (reinforced by SED), to offset fleet discounts.

The Retail Motor Industry Federation (RMIF), which represents car dealers, believes that manufacturers, through their power over supply and price, limit the dealers' ability to obtain cars from the cheapest source. At the Competition Commission inquiry in July 1999, the RMIF was asked why its members did not try to improve their margins and prices by purchasing from abroad. The RMIF's representative replied that 'suppliers have the power of life and death over a dealer'.

The SMMT disputes the assertion that the UK car market is uncompetitive. It argues that changes in manufacturers' market shares over the last ten years provide evidence for this. For example, Ford's market share has fallen from 26 per cent to 18 per cent, while Renault's has increased from 3.8 per cent to 8 per rcent. This may provide evidence of some competition in the market, but that tcompetition could be non-price competition, partly resulting,from price-fixing

There is some evidence that UK manufacturers and dealers have been making it difficult for UK consumers to purchase overseas. For example, the Consumers' Association found that misleading information was given about warranties, availability of parts and emissions standards. The European Commission has indicated that the block exemption from competition laws enjoyed by EU car makers and dealers will be under threat unless manufacturers make it simpler and more convenient for consumers to shop around in different EU countries for the lowest prices.

Other specialists have emerged to exploit the differential between the prices paid for fleet sales and retail sales. For example, some specialists obtain new right-hand drive cars by buying up unwanted fleet orders. They then sell to the public at substantially less than list price. One effect that continued higher prices have not had is to reduce consumer demand. The SMMT claims that the fact that new car sales grew by 3 per cent in the year to June 1999 shows that consumers are satisfied with the prices they are paying. Figure 2 shows that about 88 per cent of passenger journeys in the UK are made by car, which is the highest figure in the EU. This reflects the much lower relative demand for public transport in the UK. Thus the lack of availability of an acceptable substitute is one likely explanation for the lack of responsiveness of demand to price.

There seems to be a considerable weight of evidence that new car prices in the UK are significantly higher than they would be if car manufacturers did not restrict competition and prices. Consumers would benefit from the likely drop in relative prices that would result from greater competition.

Many commentators, as well as UK consumer and retailer groups, have argued that the Competition Commission should demand the immediate end to the EU Block Exemption and SED, when it publishes its recommendations in December. The European Commission

has already indicated that the Block Exemption is under threat, unless the manufacturers change their practices. Against this has to be balanced any loss in after sales service that the manufacturers claim would occur if the present arrangements were not allowed to continue.

Reductions in the relative prices of cars would have other economic effects. Real incomes of those working in the industry would be likely to fall. Substantial reductions in the relative price of cars may have damaging effects on the environment if demand increases significantly. However, the Economic Intelligence Unit argues that new car volumes will drop in the next six years as a result of a saturated market, relatively slow economic growth, and government policies that discourage car use. But it is not necessarily the case that government policies that discourage car use discourage car ownership. Italy and Germany, ninth and sixth respectively in the EU in terms of the share of passenger journeys by car, are in the top three for car ownership, with each having more than 500 cars per 1000 inhabitants (the UK has 376).

The balance of evidence suggests that a policy that stimulates price competition in the UK car market is needed. The external costs of a possible increase in car sales need to be offset by policies to introduce charges for road use, improve public transport, and further revise car tax and fuel duty systems to persuade buyers to buy smaller cars and use them less. (See Sections 11 and 14 of this issue for additional insights into the transport debate.)