Crystal clearance: one of the most obvious effects of the single currency has been to increase price transparency in the eurozone. Although this has been good news for consumers, it has forced many businesses to rethink their pricing strategies. Gavin Reid and Julia Smith explain some of the new approaches.
| Author | Reid, Gavin |
| Position | EU Price Transparency |
The eurozone is a major economic coalition. Covering a population of around 350 million, it closely rivals the US in terms of its combined gross domestic product and share of world trade. The introduction of the single currency on 1 January 2002 started an economic revolution through its effect on price transparency. It is now obvious if a Ford Mondeo is 20 per cent more expensive to buy in Germany, for example, than it is in the Netherlands.
Consumers should gain from this change. If price transparency is effective, it will force prices down by:
* increasing competition in supplier markets;
* reducing the prices of intermediate goods in business-to-business transactions;
* encouraging consumers to shop around.
Price transparency used to be reduced by many factors, including taxation systems, national attitudes and the dispersion of market segments. So it's not only the single currency that has changed the situation. Price transparency was uncommon before the emergence of the knowledge economy, for instance. Distributor margins, consumer preferences and so on kept prices different across market segments, especially if they were geographically separated. Social and cultural distance had the same effect. The internet has been the main driving force behind the knowledge economy. Because of it, the quality and volume of information on prices has risen dramatically. This trend has been aided by the arrival of devices such as wireless application protocol (Wap) technology, which can be used to compare prices on the web. It's estimated that more than 40 million Europeans will shop over the internet this year, spending around 19 billion [euro]. Such developments may have occurred without the euro, but it's questionable whether they would be on such a large scale.
The single currency has had the following major effects on firms trading in the eurozone:
* Prices for products or services supplied to companies in the eurozone needed to be amended to euros. This had to take account of competitive positioning as well as exchange rate conversions.
* Some firms opened euro bank accounts to reduce the risk of exchange rate fluctuations.
* Information and administrative systems had to be modified to handle euros.
* Prices on marketing materials had to be expressed in both sterling and euros.
* Business machines ranging from cash tills to supermarket trolleys needed adjusting to account and record in euros, or to accept and exchange euro currency.
Although...
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