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Географическая ценовая дискриминация ИКЕА Geographical Price Discrimination by IKEA
Слободенюк Ольга Вячеславовна
Студент 2 курса Факультет Школа экономики и менеджмента Национальный исследовательский университет «Высшая школа экономики»
г. Москва, ул. Мясницкая, д. 20 e-mail: olgaslob2000@gmail.com
Slobodenyuk Olga Vyacheslavovna
Student 2 term
Faculty of The School of Economics and Management The National Research University Higher School of Economics
Moscow, Myasnitskaya Street, 20 e-mail: olgaslob2000@gmail.com
Аннотация.
Статья посвящена исследованию рынка мебели и товаров для дома на предмет наличия географической ценовой дискриминации. ИКЕА используется в качестве примера компании на этом рынке. Выдвинутая автором гипотеза заключается в том, что предприятия розничной торговли на данном рынке дискриминируют покупателей с точки зрения цены на основании географически обусловленных различий в спросе. В результате анализа данных автор приходит к выводу о существовании географической ценовой дискриминации на рынке мебели и товаров для дома и устанавливает возможные причины географически обусловленных различий в спросе.
Annotation.
The article is devoted to the study of the appliances, furniture and home accessories market concerning the existence or non-existence of geographical price discrimination. IKEA is used as an example. The hypothesis of the research is that the retailers of appliances, furniture and home accessories price discriminate their customers based on demand in different countries. As a result of the data analysis, the author concludes that geographical price discrimination exists in the appliances, furniture and home accessories market and identifies possible reasons for geographical differences in demand for the products.
Ключевые слова: geographical price discrimination, IKEA.
Key words: географическая ценовая дискриминация, ИКЕА.
Introduction
Have you ever moved the house or decided to redecorate your old accommodation? What do you think about the costs of furnishing or refurnishing your living space? Do you consider them to be high? I believe most of you do. If you have had the experience of buying some new products (especially, furniture) for your home, you might have been astonished by the prices of them. In spite of the fact that bringing some fresh air to your home is not the cheapest thing to do, you can save a fortune if you go to... IKEA, especially, if you travel to a certain country.
It is well-known that prices of housewares and furnishings vary across the world. In some countries people have to pay much more than in others for the same items. It is exactly the case for IKEA products.
IKEA is the largest furniture retailer in the world. Currently there are 424 IKEA stores which operate in 52 countries including Russia. That is why I decided to focus on this company and investigate its pricing strategy in terms of geography.
If price discrimination does not take place, differences in prices of furnishings and housewares must be explained by differences in costs. If it does, prices differ much more than costs.
My research question is: why prices of appliances, furniture and home accessories vary in different countries?
The Hypothesis
The hypothesis of my research is that the retailers of appliances, furniture and home accessories price discriminate their customers based on demand in different countries. In order to prove or disprove this hypothesis I am going to learn more about how prices are set by IKEA (pricing strategy).
Data Collection
According to IKEA (2017), the top 5 countries, in terms of its total sales, are Germany, the United States, France, the United Kingdom and China (see Figure 1). That is why I am going to focus on these countries while doing this research. Another reason is that these countries are located in different parts of the world, so we might see how IKEA sets prices all over the world.
Germany United States France
United Kingdom China
Other countries
Figure 1. Total Sales. Adapted from IKEA (2017, p.71). IKEA divides all its products into several departments, based on where the items need to be placed at home.
There are ten categories, the main of which are bedroom, living room, kitchen, children's room and bathroom (IKEA).
I decided to collect information about the prices of five identical products in the five above countries. I took one
product from each of the main categories. Figure 2 illustrates these products.
MALM Bed frame, high (bedroom) EKTORP Two-seat sofa (living room) FROSTIG Integrated fridge A++ (kitchen)
STADSDEL Rug (children's room) GODMORGON Wall cabinet with 1 door (bathroom)
Figure 2. IKEA Products. Taken from IKEA (n.d.).
To compare the prices of these products in different countries, I created the following table (see Table 1). The data used in the table were derived from the IKEA annual catalogues, which are accessible on its official websites for the above countries.
Table 1. The Prices of the Products in Different Countries
Name and Series/ MALM EKTORP FROSTIG STADSDEL GODMORGON
Country Bed frame, Two-seat Integrated Rug Wall cabinet with
high sofa fridge A++ 1 door
Germany 227 299 599 14,99 79
United States 301,68 438,40 1052,07 17,56 86,98
France 239 349 599 16,99 99
United Kingdom 209,66 344,68 701,04 17,53 75,95
China 209,30 170,03 235,31 12,95 77,76
Note. All currencies were converted to Euros according to the exchange rates from Morningstar (2019, February 28). Data Analysis
In order to analyze price differences, I decided to calculate the average price of each product and after that evaluated deviations of the prices in the above countries from the average price (in percentage). While working on the data, I used the following formulas:
The average price = the total sum of the prices of a product in different countries / the quantity of the countries (in my case, 5)
Deviation of the local price from the average price = ((a local price - the average price) / the average price) *
100%
The obtained results can be seen in Tables 2 and 3.
Table 2. The Average Prices of the Products
Product MALM EKTORP FROSTIG STADSDEL GODMORGON
Bed frame, Two-seat sofa Integrated Rug Wall cabinet
high fridge A++ with 1 door
Average Price 237,328 320,222 637,284 16,004 83,738
Note. The average prices are given in Euros. Table 3. The Deviations of Local Prices from the Average
Name and MALM EKTORP FROSTIG STADSDEL GODMORGON
Series/ Bed frame, high Two-seat sofa Integrated Rug Wall cabinet with
Country fridge A++ 1 door
Germany -4% -7% -6% -6% -6%
United States 27% 37% 65% 10% 4%
France 1% 9% -6% 6% 18%
United -12% 8% 10% 10% -9%
Kingdom
China -12% -47% -63% -19% -7%
I was really surprised by the results. The prices in the USA are, on average, 29 per cent higher than the average ones, while the prices in Germany are approximately 6 per cent lower than the world average. At first glance, it may seem that it is logistics costs that play a crucial role in setting prices but if we analyze the data more carefully, we can notice that the prices in Germany and France, which are located near each other, differ a lot. The prices in France are, on average, 14 per cent higher than the average prices.
It is quite easy to notice that, in general, the prices are the lowest ones in China. They are, on average, 30 per cent lower than the average ones. That is why I thought that price differences could be explained by a Value Added Tax (VAT), the rate of which in China is only 10 per cent (see Figure 3). It is lower than the rates of VAT in Germany, France and the UK but, as for the USA, where the prices are generally the highest ones, there is no VAT at all (United States Council for International Business, 2016). That it is why VAT is not a crucial factor in setting prices.
25 20 15 10 5 0
■ Germany ■ United States «France ■ United Kingdom ■ China Figure 3. VAT Rates in Different Countries. Adapted from the United States Council for International Business (2016).
I also decided to analyze labour costs in order to find out whether the differences in prices are due to the variations in the costs of labour. Labour costs are expressed in labour cost index points. "The labour cost index (LCI) is an indicator which measures the cost of labour. The LCI is a Laspeyres index of labour cost per hour worked, chain linked annually, and based upon a fixed structure of economic activity at NACE section level. The labour costs are the total quarterly costs incurred by the employer in the employment of personnel" (National Statistics Office of Malta, 2018, p.1).
The information about labour costs in different countries was taken from "Trading Economics"(n.d).
Table 4. Labour Costs in Different Countries
Country Index Points
Germany 115.62
United States 109.05
France 108.50
United Kingdom 104.80
China 109.05
As we can see from Table 4, the number of points in the United States is exactly equal to that in China but in these two countries prices of the products are extremely different. That is why the price policy of IKEA is not based on labour costs.
To conclude the analysis, geographical price discrimination definitely takes place in the furnishings and housewares market. There are some reasons other than costs that influence the establishment of prices.
Reasons for Price Differences
As it can be seen from the preceding analysis, differences in logistics costs, VAT rates and labour costs cannot explain significant differences in prices. Materials and technologies used to make products are the same in all countries, so we do not need to take costs connected with them into account. That is why geographical price discrimination is under no doubt. I am going to find out based on what factors IKEA price discriminates its consumers.
Income Level
From Figure 4 it can be seen that the United States has the highest gross domestic product (at purchasing power parity) per capita among the five countries. "Purchasing power parity (PPP) is an economic theory that compares different countries' currencies through a "basket of goods" approach. According to this concept, two currencies are in equilibrium or at par when a basket of goods (taking into account the exchange rate) is priced the same in both countries" (Hall, 2019, p.1).
70 60 50 40 30 20 10
0
2019
■ Germany «United States ■ France «United Kingdom ■ China
Figure 4. Gross Domestic Product (at Purchasing Power Parity) Per Capita of Different Countries. Adapted from the
International Monetary Fund (2018).
I found out that the greater gross domestic product (at purchasing power parity) per capita (individual income)
of the United States can explain the higher prices in the USA. IKEA is eager to maximize its profit by setting higher prices to people living in the USA understanding that their reservation prices are not as low as those of people living in the other four countries.
We can see the opposite situation in China which has the lowest gross domestic product (at purchasing power parity) per capita among the five countries. It leads to the lower prices in China. The IKEA management team realizes that reservation prices of people living there are not as high as ones of people living in the other four countries, so it
established lower prices in China. However, in the beginning it was not like this. Firstly, IKEA established practically the same prices in China as in Western countries believing that the prices were low enough to attract customers but, in reality, the Chinese did not find the products cheap at all due to incomes being, on average, lower than those of Europeans and North Americans. The prices set by IKEA were often above the reservation prices of potential consumers. That is why in 2002 IKEA decreased its prices in China and in 2006 it launched "the lowest price in Beijing" strategy. According to this strategy, prices in its Beijing stores are approximately 20 per cent lower than in other home furnishings and appliances stores in this city. This strategy helps IKEA a lot to be attractive to potential customers (Chen & Huang, 2012, p.25).
Cultural Preferences
IKEA is widely known for its simple modernist designs for different kinds of furniture, appliances and home decorations. These designs are popular in the West, so Europeans and North Americans are well acquainted with the features of modernism and like decorating their living space in a contemporary style. That is why demand for IKEA products in Germany, the United States, France and the United Kingdom is much higher than in China where people are more used to the Asian style which is extremely different from the Western one. Chinese people are more conservative and place a higher value on traditional elaborated decorations, rich textures, deep colours, silk fabrics and painted wood. That is why, in order to sell products in China, IKEA needs to make prices there much lower than in the Western countries.
The Year of the Opening of the First IKEA Store
I also decided to compare the years of IKEA's debuts in the five countries. The data can be found in Table 5 (IKEA, n.d.).
Table 5. IKEA's Debuts in Different Countries
Country Year of Debut
Germany 1977
France 1981
United States 1985
United Kingdom 1987
China 1998
Table 5 indicates that the first store in China was opened relatively recently. That is why Chinese people are less "addicted" to IKEA than those who living in Western countries cannot imagine their life without it. For Europeans and North Americans it is usual to have at least several IKEA items at home. The Chinese do not consider using IKEA products as an integral part of furnishing and decorating their homes. They remember their life without IKEA and are used to buying substitutes for IKEA products. That is one more reason why the prices in Western countries are generally much higher than those in China.
Conclusion
All things considered, I confirm the hypothesis that there exists geographical price discrimination in the retail market of furniture, appliances and home accessories. This hypothesis was proven using the example of IKEA. I found out that it is not logistics costs, rates of a value-added tax or labour costs that explain quite significant price differences in the prices of the products. IKEA sets prices for its products based on differences in demand in various countries. These dissimilarities can be explained by distinctions in the level of income, cultural preferences and the year of the opening of the first IKEA store in the country. Being aware of the fact that the prices of housewares and furniture vary across countries can help you to get a higher consumer surplus.
Список используемой литературы:
1. IKEA. (2017). IKEA-Yearly summary 2017. Leiden, Netherlands: IKEA. Retrieved from https ://www. ikea. com/gb/en/doc/general-document/ikea-read-ikea-group-yearly-summary-2017 1364478360662.pdf
2. IKEA. (n.d.). Rooms. Leiden, Netherlands: IKEA. Retrieved March 2, 2019, from https ://www. ikea. com/gb/en/this-is-ikea/
3. Morningstar (n.d.). Markets. Chicago, Illinois: Morningstar. Retrieved February 28, 2019, from https://www.morningstar.com/markets.html
4. United States Council for International Business. (2016). Value added tax rates (VAT) by country. New York, NY: United States Council for International Business. Retrieved from https://www.uscib.org/value-added-tax-rates-vat-by-country/
5. National Statistics Office of Malta. (2018). Labour cost index. Valletta, Malta: National Statistics Office of Malta. Retrieved from https://nso.gov.mt/en/nso/Sources and Methods/Unit C2/Labour Market Statistics/Pages/Labour-Cost-Index.aspx
6. Trading Economics. (n.d.). Labour costs. New York, NY: Trading Economics. Retrieved March 3, 2019, from https://tradingeconomics.com/country-list/labour-costs
7. Hall, M. (2019). What is purchasing power parity (PPP)? New York, NY: Investopedia. Retrieved from https://www.investopedia.com/updates/purchasing-power-parity-ppp/
8. International Monetary Fund. (2018). World Economic Outlook. Washington: International Monetary Fund. Retrieved from https://www.imf.org/external/datamapper/PPPPC@WEO/THA
9. Chen, M., & Huang, X. (2012). Why do IKEA's products have different prices in different countries? Kalmar, Sweden: Linnaeus University. Retrieved from http://www.diva-portal.se/smash/get/diva2:542036/FULLTEXT01.pdf
10. IKEA. (n.d.). IKEA store locator. Leiden, Netherlands: IKEA. Retrieved March 3, 2019, from https ://www. ikea. com/gb/en/store/
