Rand journal of economics vol:27 issue:2 pages:240-268
Why are car prices so different across European countries? I construct and estimate an oligopoly model to analyze whether international price discrimination can explain the puzzle. Three sources of international price discrimination are considered: price elasticities, import quota constraints, and collusion. The data reveal that international price discrimination accounts for an important part of the observed price differences. Low price elasticities (or domestic market power) are present in France, Germany, the United Kingdom, and especially Italy. Binding import quota constraints on Japanese cars exist in France and Italy. The possibility of collusion cannot be rejected in Germany and the United Kingdom.