Q.1: What are the sources of significant price differentials in the EU automobile market?

Despite of strong economic integration through EU, the concept of one market is still not feasible in the Europe. The issue is more highlighted with the price differentials within the region. As mentioned in the case the major source of price differentials is the restricted free competition among the car dealers in Europe. The block exemption clause in the EU competition policy enabled the car manufacturers to control the location and terms of trade for the car dealers. Due to this, the car dealers were restricted to carry a free and competitive business among them. Although the manufacture of cars was market driven its distribution was controlled by the manufacturers. As rightly sighted in the case, that if a dealer wanted to initiate a business in Belgium, then the company might restrict the dealer to sell cars of other brands or to sell the its own car to other countries. This control on the dealers segmented the market through controlled competition which resulted in such a difference in prices of same cars within the European market. Apart from this main reason, other factors that might boost the price differences in European market could be as follows: * Different levels of transportation costs in different markets * Varying levels of purchasing power among the market * The cost of conducting business like rent, salary expenses, income tax level etc. will ultimately affect the pricing of the cars in different countries * Even the marketing and pricing policy opted by the companies themselves to serve different markets will result in price differentials.

Q.2: In a pure single market would these price differentials exist? By what process might these price differentials be eradicated? As per the theoretical framework, the price of same commodity will be even in a single market. It is because there uniform terms and conditions of trade, same level of tariffs and regulatory frameworks. But if the companies themselves are allowed to control the location and terms of dealership, then the price difference will still exist in single market. In this case also the main reason for price differentials was not the tariffs between the two markets. Even in a single market, the supply and distribution mechanism, if not allowed to run freely might result in price differentials to a greater extent. Let us assume that there are no governmental or organizational interferences in the market, but still then a small degree of price difference will exist. It is because of the transportation cost involved in carrying goods from the manufacturing plant to the market. The proximity to a manufacturing unit will determine the transportation cost of the goods, which will ultimately be reflected in selling price of goods. So, in a perfect single market the price might not differ significantly but it will still exist. The following steps will help to eradicate the price differentials in market:

* Complete removal of any barriers to trade * Perfect flow of information between the markets * A full market driven economy where supply and demand are controlled by the market Q.3: Why do you think that the UK is one of the most expensive car markets in Europe? There are several reasons behind the UK market being one of the most expensive car markets, they are as follows: * Tight control and lack of competition among the dealers which will make their operation inefficient and costly. The main basis for such actions is the block exemption clause in EU competition policy. * High costs of doing business in UK and its cost of living. * Governmental rules and regulations on dealership and transportation taxes might be much tougher in UK which will increase the price of the cars. * The purchasing power of the customers in UK might be higher than most other European countries. * Sine UK dealers uses the GBP as their trading currency, any exchange rate fluctuation or inflation in UK is set to influence the prices of cars in UK.

Q.4: What do you think will happen to the price differentials in the EU automobile market under the new regulations set to take effect in September 2005? After the implementation of new regulations, the dealers will be free to set their outlets in any location with any number of brands to sell. This will remove the imposed restriction by the companies on the dealers, thus enabling free competition and efficiency. So the degree of price differentials is bound to decrease in the European market. But still other factors will be unavoidable, which will maintain the price differences to some extent. The transportation costs, national policies, cost of living and doing businesses will all add to the reasons for setting different prices for different markets. After the implementation of new law, the major reason for price differentials will be eradicated, thus reducing the level of price differences between the most expensive and the cheapest markets in Europe. But even this new regulation will not be sufficient to completely remove such price differences between the markets. Q.5: What will be the impact of these new regulations on a) competitive intensity in the EU automobile market b) Profitability of automobile operations in the EU? The new regulations are set to increase the competition in the automobile market by removing control of the companies over the dealers. Although there was high level of competition on part of automobile manufacturers, but there was high level of control and restrictions on the supply and distribution of the cars. Due to the increased competition the pricing and operations will be more efficient, thus creating more value to the customers.

There was some sort of control and unfair practices by the car companies, which forced the customers to pay much higher than its cost. Such practices were troublesome and costly for the customers but highly profitable to dealers as well as the manufacturers. Due to this the clause of block exemption and price differentials were persistently complained by the customers. After the new regulations there will be intense competition and increased efficiency among the dealers as well as manufacturers. So, the profitability level of the automobile operations is set to decrease it they are not able to increase their efficiency.