A study of the potential effects of the conversion to euro
| Published date | 01 June 2002 |
| Pages | 134-146 |
| Date | 01 June 2002 |
| DOI | https://doi.org/10.1108/10610420210430033 |
| Author | Pierre Desmet |
| Subject Matter | Marketing |
A study of the potential effects
of the conversion to euro
Pierre Desmet
Professor, Paris-Dauphine University and ESSEC Business School
Keywords Currency, Euro, Perception, Germany, Spain, Pricing
Abstract Early research work confirms that the use of the new European currency, the euro,
could create an effect of money illusion: expressed in euros, perceived prices seem lower and
price elasticity diminished. But it also concludes on the complexity of the relationship
between prices, currency unit and behavior as the money illusion effect can either increase or
decrease demand for specific brands. Tests the assumption that the size of the money illusion
could vary by country and is positively related to the level of the conversion rate. Applies the
Gabor and Granger method to the price of an item of domestic equipment in two countries,
one with a big conversion rate (Spain), and one with a small conversion rate (Germany).
Observes a money illusion effect with an increase in intention to buy when the prices are
expressed in euros in Germany but, as this effect is not observed in Spain, concludes that a
positive relationship between money illusion and conversion rate cannot be accepted and
proposes alternative hypotheses, such as the difficulty of the conversion.
Introduction
In most European countries, the replacement of the currencies by the euro
will generate a compression of the price scale as prices will be divided by a
factor of 1.95 in Germany, 2.20 in The Netherlands, 6.55 in France, 40.34 in
Belgium and 166 in Spain. For example, the price for a McDonald
hamburger in France will fall from 5 FF to 0.76 euro. This major change on
the price scale could lead to significant consequences for buying behavior
regarding the decision to buy or the choice between brands as consumers are
often influenced by the money illusion effect. This effect describes the
modification of a choice following a change of situation without any change
in the relative prices (e.g. Fehr and Tyran, 2001). The higher the conversion
rate, the smaller the price difference will look, and it is assumed that the
money illusion effect should have a heavier impact on countries with higher
conversion rates (Spain and France more than Germany and The
Netherlands).
This effect could decrease price elasticity and hurt demand for private brands
relative to national brands, since previous research has already shown that a
lower price is a key part of the private brand positioning (Dhar et al., 1999)
and that the competition is asymmetric, a private brand being more sensitive
to the price of the national brand than the reverse (e.g. Heath et al., 2000).
Early research has shown that a weak money illusion effect exists in France
(Desmet and Gaston-Breton, 2001) and in Germany (Diller and Ivens, 2000)
where large variations in the demand for specific brands are observed, often
with an increase for premium, high-price brands. But results in Germany
also demonstrate that the effect of the euro on price elasticity is complex:
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The author would like to thank Mr Dedeyan (IOD Institute) for financial support,
technical assistance and coverage of the international data collection.
Compression of price scale
Money illusion effect
134 JOURNAL OF PRODUCT & BRAND MANAGEMENT, VOL. 11 NO. 3 2002, pp. 134-146, #MCB UP LIMITED, 1061-0421, DOI 10.1108/10610420210430033
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