International Price Comparisons: Methodology and Application to Non-Tradable Goods

Abstract

This paper deals with the methodology and interpretation of international price comparisons, focusing specifically on non-traded goods and services. The key difference to traded goods lies in the underlying objective of the comparison. International differences in the prices of traded goods are indicative of potential welfare gains that could be achieved through greater integration. In contrast, comparisons with non-traded goods mainly serve as a form of benchmark that can be used to assess the efficiency and competitiveness of the domestic non-traded goods sector. However, the prices of non-traded goods are determined by a multitude of factors, including the performance of the domestic traded goods sector. Thus, to provide any sensible guidance for competition policy, international benchmarking must also take account of all differences in underlying cost and market structures. Looking at prices alone may give very misleading results, as the paper demonstrates on the basis of two examples from the Swiss tourism and telecommunications sectors.