Abstract
Prices of identical products differ tremendously among EU countries. Prices of IKEA products range by more than 40% on average, which is far more than the 12% price difference the EU Commission regards as compatible with competitive markets. These price differences can only partly be attributed to differences in non‐tradable cost components between countries (such as wage costs or value‐added taxes). The economic explanation for this phenomenon is that consumers are hardly aware of differences in prices across countries and that transportation costs are too high to make arbitrage profitable. Market intransparency for the consumer allows firms to discriminate between regional markets. However, knowledge of market‐specific demand conditions is very limited leaving firms to find the profit maximising price in a trial‐and‐error process.
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