Saturday 14 May 2011

Fairly interesting...

From an article in The Daily Mail a few weeks ago:

Consumers are being hit by a 'postcode lottery' in the cost of buying goods, with some paying at least £500 more for exactly the same items. A study of the prices of 200 items at 12 different locations nationwide revealed that some shoppers are being ripped off and paying up to £537 more than in other areas. Researchers compared the cost of electrical products, homeware, stationery, toys and entertainment.

The average cost of the 200 items came to £15,508 in Swindon, in Wiltshire, and £14,971 in London. Swindon was the most expensive shopping destination in the country with prices £171 above the national average, website Kelkoo discovered.

In Wrexham, north Wales, and Peterborough, Cambridgeshire, customers were paying £164 and £148 above average. Remarkably London, despite its high cost of living, has the cheapest retail prices in the country, with the goods costing £366 less than the average, according to the report. The cost of electrical goods alone was £445 lower in London than it was in Wrexham...


Now, we don't know how rigorous the research was, and it appears to have been carried out by a price comparison website called Kelkoo (who have a vested interest in getting people online to shop around), but it's interesting nonetheless, as it illustrates, yet again, that competition drives prices down. Very crudely speaking, the bigger and less isolated the town, the cheaper things are in the shops.

But remember: this generalisation only applies to physical goods which are both produced and consumed a long distance from the actual point of sale, and which are traded all across the globe. Services, and goods consumed at point of use - i.e. a cup of coffee, a beer, a tank of petrol - are very much more expensive in London because you are paying a lot of embedded rent.

13 comments:

Curmudgeon said...

Not sure that applies to petrol - if you look on www.petrolprices.com the spread of prices is much the same for "London" and "Manchester".

Anonymous said...

Yeah, the "embedded rent" is found in the small shops you get at petrol stations. Wouldn't petrol be cheapest where the barrels come off the ships, as it doesn't need to be driven around the country?

Interesting but as a resident of the capital, LVT would probably make things more expensive for me as London shopkeepers who bought their premises at a low price now have to pay high LVT.

Sobers said...

As your resident Swindonian, this was covered in the local rag at the time, and they concluded you could buy most of the items mentioned at considerably lower prices and still in Swindon, if you shopped around.

http://www.swindonadvertiser.co.uk/news/local/8989418.It_pays_to_hunt_out_those_bargains___/

Mark Wadsworth said...

C, I thought there was a price gradient for petrol. Maybe there isn't?

Anon, nope. Shopkeepers already pay rent and Business Rates (so LVT wouldn't be much different).

Even though rents and BR are much higher in London that Swindon, goods are still cheaper in L (because of competition) and the rents are a balancing figure, i.e. if you can sell ten times as much in London per sq ft of retail space (albeit at a lower profit margin) then the rents are correspondingly higher. Rents are a function of profits and so cannot be 'passed on'

Further, VAT will be the first tax to go in trh transition to LVT, which will knock prices down by about 5%. Overall, goods and services will be a lot, lot cheaper without any taxes on them.

S, I did wonder how 'rigorous' this research was, I was taking it at face value.

Old BE said...

MW, does this mean that if we allowed even more people to live and work in London then the embedded rent element might fall too and so everyone would win?

Does it also mean that NIMBYs everywhere are shooting themselves in the foot? I do hope so!

Mark Wadsworth said...

BE,

1. Not really, the more people live in an area, the more efficient the economy and the higher the rents, so the higher the embedded rent on coffee, beer, petrol. You can minimise your share of the rent by living in a high rise block of course, but cafes, pubs, petrol stations are (nearly) always at ground level.

2. NIMBYs are of course shooting themselves in the foot in absolute terms (they'd be wealthier if they allowed more development in their area) BUT they don't care about absolute terms, they care about relative terms, i.e. they'd rather have a quarter of a £10 pot than a fifth of a £15 pot, i.e. they know that a quarter is more than a fifth and don't care that £2.50 is less than £3.00.

DBC Reed said...

Competition may drive down prices under ideal circumstances but the present set-up is not ideal.In one- supermarket Tesco towns there is of course no competition so these figures for Sticksville may show that.The only way to get the same prices everywhere (small shop and supermarket included,thus saving small shops) is to re-introduce Resale Price Maintenance (gasp shock) which was axed by by the same Tories who got rid of Schedule A.Despite " educated opinion"getting the vapours over RPM (as it was abbreviated),it was relegalised in the USA in 2007.Not a dickybird about it over here,of course.

Mark Wadsworth said...

DBC, you'll find no support for RPM with me.

1) I like supermarkets. Tesco just take the piss with the planning system, which is easily fixed.

2) Supermarkets also indirectly make money from the farming subsidies because farmers are happy to sell stuff to the supermarkets at a loss. That's even more easily fixed.

3) If producers don't want shops to sell their products for less than £x, then they can just refuse to supply shops who sell it for less than £x.

4) I'm a big fan of off-licences as well, but they do no compete on price, they compete on convenience.

DBC Reed said...

Shops can't do 3):that's Resale Price Maintenance.In the American Supreme Court case in question Leegin Creative Leather got shirty that Kay's Kloset was selling their
high-class merchandise at a discount and making it look cheap.Their case was backed by Chicago School economists and they won.
In the Uk you have to supply shops which can sell your stuff at whatever price they like,so supermarkets can run discounts (that manufacturers often take a cut on)which put small shops and small manufacturers and farmers out of business.
You may be confusing vertical RPM with horizontal RPM which is just a price-fixing ring.
Also for a tearway economic renegade you're a bit square about anything bar LVT (where you are admittedly "far out man").Lighten up man.Take a walk on the wild side
( I am referring to the Jimmy Smith
masterpiece with Quincy Jones not the Lou Reed gender bender song ,which was not as good as Ray Davies' "Lola" in my opinion,lacking the British humour.)

Mark Wadsworth said...

DBC, well what do you mean exactly? Let's say you bring out your own range of comfy DBC knitwear and decide that you don't want your jumpers to be sold for less than £30 in the shops.

So you just put in the contract with Tesco (or whomever) that they may not sell them for less than £30. If they refuse to agree, then you don't supply them. Simples.

Or do you mean that you, Mr DBC can make parliament introduce a law that say nobody is allowed to sell a jumper for less than £30? Well, what's the point of that? The supermarkets would love it, because they can now import them from Vietnam for £1 and sell them for £30, and they'll never trouble Mr DBC Enterprises ever again!

So you'd need trade barriers as well if you wanted the higher price to accrue to UK manufacturers, and trade barriers are a very bad thing indeed.

Old BE said...

In my comment I meant without stating it that we might resolve the higher embedded rent bit by allowing people to build higher and wider.

Mark Wadsworth said...

BE, that would work fine for most things with embedded rent (for example hotel rooms and probably cinema tickets) but not specifically coffee, beer or petrol which are usually sold at street level (which is absolutely fixed in supply).

There is also a premium for a cup of coffee on a pavement with a nice view and a bit of sunshine, if everything is built higher and wider, then there'll be fewer such places.

DBC Reed said...

The Simples examples you give are considered to be Resale Price Maintenance and were outlawed in 1964.Look up the definition of Resale Price maintenance on Wikipedia;this gives your example in the definition of illegal practice.Better is Greg Mankiw's Blog on Resale Price Maintenance which gives some of the background on Leegin (although I am in contact with one of the Chicago U
team who gave expert testimony if you don't believe it).
This is basic point: who sets prices? If its the cartel of supermarkets ,as now ,the producer class falls under the control of "the middlemen" as the American Populists (small farmers mainly) were complaining in George's time.
If the manufacturers insist on maintaining their own prices (RPM)
and do not enter any price fixing rings with anybody else ("horizontal price fixing"),competition flourishes AND small shops get to sell Kellogs Corn Flakes at the same price as the supermarkets which would otherwise discount.
I am the only RPM-er in the village I know.