Price changes in the Polish car market:
Effects from EU accession
Nick Silderhuis
S1258362
University of Groningen, Faculty of Economics
Email: nicks@home.nl
March 2007
Abstract
Table of Contents
1. Introduction... 2
2. Problem Analysis and research question... 3
2.1 Research Question: ... 4
3. Poland’s economic development ... 4
3.1 Poland’s economic and trade policy development ... 4
3.2 Poland’s Automobile Market ... 7
4. Previous research on trade liberalization and price effects... 13
5. Method... 19
6. Data... 21
7. Empirical Results... 23
8. Conclusion... 26
1. Introduction
Due to trade liberalization economic welfare increases1. This increase in welfare arises due to two factors. One is the so called “market discipline” effect, which means that products that are present in the domestic market will decrease in price because of more competitive pressure from imports. The second factor is that due to more imports there will be more variety in the market, which means that consumer preferences will be better matched. In this thesis the first factor “the market discipline effect” will be investigated.
Poland became a member of the European Union in may 2004, therefore trade barriers were completely loosened and more competition arose in the Polish market since that time. Since more competition arose price effects in the Polish market could be expected. Such effects are prominently present in the Polish automotive sector. Before European Union accession, used car imports were one of the only products which were still blocked by trade barriers in Poland2. After European Union accession by Poland trade barriers completely vanished and imports of used cars increased significantly. Interestingly, the sales of new cars decreased. Considering the increase in import of used cars, it is reasonable to assume that the increased competition from foreign vehicle sellers posed serious problems for sellers of new cars in Poland. The sellers may respond by decreasing the price of their cars. This thesis examines the price changes in more detail.
The research question in this thesis is: What are the impacts on new car prices due to the increased imports of used cars into Poland after Poland’s EU accession in 2004?
To estimate the change in new car prices after trade liberalization, quality adjusted prices will be estimated. This will be done with a Hedonic price equation since that model takes quality changes into consideration.
The outline of this thesis is as follows. In chapter 2 the problem analysis and research question will be discussed. Chapter 3 contains Poland’s economic and trade policy development and the development of Poland’s automobile market. Chapter 4 contains Previous research on trade liberalization and price effects.
In chapter 5 the method for the research will be examined. And in chapter 6 the data used will be discussed. Chapter 7 contains the empirical results and in Chapter 8 conclusions will be drawn.
2. Problem Analysis and research question
As mentioned in the introduction there is a significant increase in imports of used cars from European countries into Poland since Poland joined the European Union in may 2004. Because of the free trade circulation of cars within the European Union, it is possible for Polish consumers to import used cars from other European Union countries without any barriers from March 2004 onwards.
It is obvious that the Polish consumers made use of the liberalized markets as the increase of used car imports in 2004 is enormous. Conversely, the sale of new cars in Poland decreased. It was clearly necessary for the sellers of new cars to respond to the liberalized markets.
Since the above phenomenon is a possible change in the market caused by trade liberalization, it is economically interesting to test the impact on quality adjusted prices of new cars due to increased imports of used cars into Poland.
2.1 Research Question:
What are the impacts on new car prices due to the increased imports of used cars into Poland after Poland’s EU accession in 2004?
As described in the introduction there are mainly two (welfare) effects because of trade liberalization. In this thesis “the market discipline effect” will be investigated. The impact on new quality adjusted prices of cars because of the significant increase in used car imports due to the accession of Poland in the European Union will be analyzed. Quality adjusted new prices are the prices for new cars corrected for quality upgrades. Since competition in the Polish car market has gone up, car manufacturers include more extras in the standard model to make new cars more attractive.
3. Poland’s economic development
3.1 Poland’s economic and trade policy development
Negotiations about Poland’s membership in the EU and the acceptance of the European Union external tariff affected considerably the level of import tariffs, which decreased significantly. The customs rates on personal used vehicles were reduced to 15% in 1999.3 Because of the reduction of these duties external trade increased significantly. External trade was vital to the economic transformation of the Polish economy and Poland had increased access to competitive imports following trade liberalization. Due to these facts it was possible for Poland to have an export-led growth.
After liberalizing for 9 years in accordance with the trade section of the Europe treaty Poland was in 9th place as a non EU supplier of the European Union market and in
4th place as a non EU buyer of the European Union in 2001.4
As can be seen in table 1 Polish imports reached 68 billion USD before entering the European Union in 2003 and exports reached a level of 53.5 billion USD. Compared to 2002 exports grew with 31% and imports grew by 23%. In 2003 69% of all Poland’s export and 61% of all Poland’s imports was the trade between Poland and the European Union. Since Poland joined the European Union in May 2004 it’s exports even rose. In 2005 Poland imports were 92.72 billion USD and exports were 95.67 billion USD.5
Table 1 Poland’s Imports and Exports (US $ Millions)
1994 2003 2004 2005
Imports 21.000 68.000 83.000 92.720
Exports 18.000 53.500 80.000 95.670
Source: economywatch
Poland’s main export partners in 2003 were: Germany, France, Italy, United Kingdom, Netherlands and the Czech Republic. The percentages exports to these countries to total exports can be found in figure 1.
Figure 1 Source: PAIZ
Poland’s main import partners in 2003 were: Germany, Italy, Russia, France and China. The percentages of imports from these countries to total imports can be found in figure 2.
Figure 2 Source: PAIZ
Although Poland eliminated all trade barriers on almost all industrial products and consumer goods in 2002 to fulfil all the obligations to become a member of the European Union, the Polish government imposed other forms of barriers on used cars early 2003. This was done because there was a clear change in the delivery of passenger vehicles to the Polish market from 1999 onwards. In 1999 the custom rates on used vehicles went down to 15%. This decrease of custom rates on used vehicles had the effect that the demand for used vehicles increased in relation to new cars. So from 1999 onwards the number of new cars delivered to the market went down and on the other hand used imported cars delivered to the Polish market increased significantly. To stimulate the new car sector, the Polish government adopted in 2002 a package of system solutions called “The automotive industry, directions of activities.” These so called solutions contained technical, fiscal and administrative protections for the domestic industry.6 After the accession to the
European Union in May 2004, the market completely liberalized with the consequence that used cars import went sky high and new car sales dropped heavily.7 Although there was a small market composition change in 1999 it is far
more interesting to analyze the market composition change in 2004 since then the market completely liberalized and changes were more shocking. Moreover, since the dataset starts in 2000 there is no issue with the effect of the 1999 policy change on the results of this research.
.
3.2 Poland’s Automobile Market
The downturn in the automobile market worldwide in the late nineties had a bad influence on the fast growing automobile sector of Poland. A lot of big global automobile manufacturers like Fiat, Ford and Daewoo had some extreme financial difficulties. These financial difficulties had a direct influence on companies in the car manufacturing and car components sector in Poland. Even the car manufacturer Daewoo went bankrupt in Poland in 2000. Because of this bankruptcy, the
established company Daewoo-FSO fell apart and the former government owned car manufacturer FSO became independent again.8
At the end of 2004 Poland had a population of nearly 40 million people. The total amount of automobiles driven by in Poland is more then 15 million. Of this 15 million vehicles there are 11 million passenger cars. The number of passenger cars in Poland is assumed to grow over 15 million by 2010. Most of all these vehicles come from the European Union. Although vehicle manufacturers and automobile part suppliers establish themselves more and more in Central and Eastern Europe, the majority of all new cars in Poland are imported from 2001 onwards, as can be seen in figure 3. The main reason for this growth in imports of new cars is the decreasing of the import tax on new cars from the European Union, this tax completely vanished on 1 January 2002. Other reasons for the increase in new cars import are the changing consumer preferences and the bankruptcy of the car manufacturer Daewoo in Poland.9
Figure 3
Local Production of Cars in Poland is dominated by Fiat for over 15 years now. Fiat covered over 67% in 2005 and almost 50% of the domestic production in 2006. Other big players in the market since the 1990s are Opel (GM), Volkswagen, FSO (previously known as Daewoo-FSO) and Intrall. The share they have in domestic car production in 2006 can be seen in Figure 4.10
Figure 4
Source: Samar
The number of cars sold in Poland grew significantly in the last decennium and hit the highest point in 1999 (before European Union Accession) with sales of more then 640.000 new cars and 114,180 of used cars in Poland.
After the highest point of car sales in Poland in 1999 was reached there was a deterioration in the sales of cars. Because of the deceleration of the development of the polish economy and the weak financial condition of Polish consumers, there was a preference for used imported cars in Poland. On top of that trade barriers decreased for industrial products which made it more and more possible to import
used vehicles in Poland at reasonable prices. Overall polish consumers preferred used imported cars because of extra luxury which was already included in the car and used imported cars were more affordable than new cars for the majority of the Poles. The number of used imported cars went up from 1999 onwards. Used cars imports went up from a little over 55.000 in 1995 to over 228.000 in 2002.11 Of all
these used car imports 70% was older than 10 years12
To stimulate the sale of new cars in Poland and to decelerate the imports of used cars, the Government adopted an action defined in a document “Motor vehicle industry – directions of proposed actions” in 2002, the action would be in power from 1 January 2003. There was a proposition about a limit in the number of used cars imported into the country. On top of that there was an introduction of some requirements of environmental norms for used cars that were newly registered and linking the value of the excise tax with the car’s age. Because this action was taken, new car sales went up again in 2003 since 1999.
The number of imported used cars was significantly limited due to the new legislation controls of the government in Poland in 2003. The number of imported used cars decreased from 179,000 used cars in 2002 to a little over 35,000 used car imports in 2003.13
After Poland accessed the European Union on the 1st of May 2004 the number of imported used vehicles increased tremendously. In the first 9 months of 2004 the import of used cars grew 18 times in comparison with the same period a year earlier. 96% of the imported used cars came from the European Union countries.14 In absolute numbers the number of used imports went up from 35.000 in total in 2003 to over 520.000 in only the first 9 months of 2004.
To summarize the above regarding the number of used car imports in the polish market, figure 5 and table 2 show that due to trade liberalization the share in the
11 Europe Auto parts 12 Samar
market of used cars increased over the years. In 2003 the one time decrease of the share of used cars in the market, and in figure 6 the tremendous increase in market share for used cars can be seen from 2004 onwards.
The most important fact for this tremendous import of used cars from other European Union members was that due to the accession of Poland to the European Union there was free trade circulation of cars within the Union.15
Most of the used cars were imported from Germany. Although the fact that the number of used imports were extremely high in 2004, car producers expected a fall in the number of used imports in the next year years due to the fact that the demand for those cars would fall. The opposite was true in 2005. The number of used imports in that year grew with another 2.2% to 870,777 in comparison with 851,982 used car imports in 2004.16 New car sellers saw that the sales of new cars dropped again in
2005 by 25.96%, in absolute numbers the sales of new cars went down from 318,093 in 2004 to 235,509 in 2005.17
Sales of New and Used Cars
0 200000 400000 600000 800000 1000000 1200000 1400000 2000 2001 2002 2003 2004 2005 2006 Year U n it S o ld Used New
Figure 5 Source: Ministry of Internal and Administration & Poland’s customs
15 Press Release Europe 16 Samar
Table 2
Source: Samar
From January till April 2006, as well used imports of cars went down as well the sales of new cars in Poland. Used car imports as well as new car sales went up again from June and September 2006 respectively.
Data in Figures 6 & 7 show monthly used car imports. The data is monthly because then the significant increase in imports can be seen when Poland joined the European Union from may 2004 onwards.
Figure 7
4. Previous research on trade liberalization and price
effects
Because the car market composition changed fast in Poland since the complete liberalization on used cars, price effects can be identified. Since those price effects will be analyzed in this paper, this part of the thesis describes some other papers in which price effects are analyzed.
research is about price dispersion in the European car market. In this paper Goldberg and Verboven estimate a relevant price dispersion in the European car market with a hedonic price model.
Clerides did research in the Cyprus market for used cars. The reason for this research specific on Cyprus was because Cyprus relaxed its trade barriers by lowering the import restriction on used cars by increasing the allowable age of an imported vehicle from two till five years in 1993. Due to this policy change imports of used cars increased tremendously in Cyprus. In Poland we have seen the same tremendous increase in imports of used cars after trade liberalization through accession of the European Union. In Cyprus this increase in inflow of used cars had an impact on quality adjusted prices of new cars. In this paper will be analyzed if this increase in imports of used cars also had an effect on new car prices in Poland, therefore the paper is relevant to the research question of this thesis.
standard new car model to increase the quality of the standard model. This was done to compete more with the cheaper used imports. Clerides estimated price drops of 10.9% of pre-tax prices and 5.9% of after-tax prices on new cars. Because Clerides used a hedonic price equation to estimate quality adjusted prices this paper is relevant for this thesis, since quality adjusted price effects will be analyzed in this thesis after European Union accession by Poland.
After he estimated the price change, Clerides used an utility function for automobiles to calculate the different utilities consumers derive for different types of cars with different product characteristics. He estimated demand for automobiles using data over a 14 year period before and after the increased availability of used imports. He then removed used car imports from the consumer’s choice set and calculated the demand in this scenario for new cars. The difference between the actual and the counterfactual scenario presented the consumer welfare gain from the policy change. His conclusion on this part of the research was, that there are welfare gains in the order of several hundred dollars per purchase, even over a thousand dollars in 1998, due to the enormous inflow of used cars in the Cypriotic market. He concluded that most of the gains were not due to the price drop of existing products but rather due to the introduction of new products on the domestic market, i.e. used cars. This finding is a strong indicator for theories that suggest that increased product varieties are an important benefit for trade liberalization.
In this thesis a similar approach will be used to test price impacts for the Polish market using a hedonic pricing equation after the increased competition due to increased imports of used cars in 2004.
estimated, demand estimations are made and welfare gains are analysed because of trade liberalization.
Fershtman and Gandal, wanted to analyse the welfare losses on the Israeli market, specific the automobile market, due to the boycott. According to Fershtman and Gandal there were the following effects due to the Israeli economic boycott: 1) Equilibrium prices were affected of the cars sold in Israel, 2) the varieties of the cars available in the Israeli market changed, 3) types of cars purchased changed and 4) the total number of cars purchased changed. All these effects had influence on consumer welfare.
The economic boycott in the automobile market in Israel seemed to be quite successful in insuring that the leading Japanese manufacturers (Toyota, Mitsubishi, Mazda, Honda, Nissan) and all the Korean automobile manufacturers stayed out of the Israeli market. The Arabs succeeded with the boycott to keep the Japanese automobile manufacturers out of the Israeli market till 1994. Only one major Japanese automobile manufacturer, Mitsubishi, entered the market earlier namely in 1988. All Korean manufacturers followed the example of most Japanese companies and entered the market in 1994.
To analyze the market Fershtman and Gandal used estimated discrete-choice models of product differentiations. These models make possible estimations of both the demand and oligopoly pricing aspects that characterize differentiated product markets. The models they used were developed by Berry (1994) and Berry, Levinsohn, Pakes (1995).
When Fershtman and Gandal wanted to estimate the economic effects of the Arabic economic boycott on the Israeli market with these models they faced some problems. One method they wanted to use was to make an estimation with a dynamic model18 using a period that covered both the boycott and the post boycott equilibria, and they wanted to measure the welfare gains over time. To estimate the equilibria in the
Israeli automobile market, Fershtman and Gandal used a nested logit model, this model is appropriate when the substitution effects between products primarily depend on pre-determined classes of products. This assumption seemed quite reasonable to Fershtman and Gandal for the automotive industry since automotive manufacturers use a standard classifications system (small, medium, large, luxury).
The problem they faced with this estimation was that there were many significant changes in Israel over the last few years that made it almost impossible to isolate the effect of the boycott. Because of these difficulties they estimated the market
equilibrium in the Israeli automobile market and then simulated the equilibrium that would have been if the boycott had continued. They chose the year 1994 because then all major Japanese and Korean firms entered the Israeli market again. They estimated that if the boycott continued the market for automobiles would have been 12% smaller and there would have more less expensive cars.
The main findings of Fershtman and Gandal were that if the boycott would have been continued, prices of cars would have been not much higher, because of the competitive market in Israel there is a close substitute for almost every model in the market. The same as in the paper of Clerides, described above, most benefit is achieved through increased variety. The welfare achieved in this paper due to increased variety is named peace dividend. The welfare loss would have been about $790 per purchaser, a total of $89 million to consumers, in 1994 if the boycott would have been continued.
In both papers described above the impact on car prices is estimated because of the disappearance of trade barriers. In this thesis I am also analyzing what the impact is on prices of new automobiles after an enormous inflow of used cars due to liberalization in Poland.
as big as 30% between two different countries. These percentage differences are fairly constant in the price of a car, this means that the absolute price differences are the highest for the most expensive cars. Also they analyze data from 1980 to 1993 and there is no sign in any decline in the price differentials.
The paper of Goldberg and Verboven mainly has two goals: They described the pattern of price dispersion in the five major European markets from 1980 to 1993. And second Goldberg and Verboven wanted to identify the sources of cross country price differentials within the framework of an oligopoly model.
They distinguished themselves with their research because they take into account quality differences. They did this to exclude potentially cross country price differences based on only quality. Because of this quality adjusted price information their
research is important for this thesis since in this research quality adjusted prices are analyzed in Poland when trade barriers are liberalized.
Goldberg and Verboven used a Hedonic Price formula to estimate quality adjusted prices for different car models in the five different countries. They used hedonic price indices for every country and every year. All product characteristics, like horsepower and engine size, are in those indices and those measured quality differences.
Goldberg and Verboven concluded that across the 5 different countries there is an average price difference of 20% between the UK and Italy over the 14 years
analyzed by them. Year to year fluctuations even reached the highest point at a 35% price difference. The cheapest country in the sample of Goldberg and Verboven was Belgium over the 14 year period.
5. Method
As described earlier, car manufacturers included more extras in the standard new car models, because of more competitive pressure of used imported cars in Poland. Because we see this phenomena it is interesting to estimate price changes of new cars while taking into account the extras which are included in the standard package of the cars. Because of the inclusion of these extras, the quality of these new cars has gone up. Because of this quality increase, it is interesting to know how new car prices changed in relation to the added quality on the new cars. Therefore a model is needed to estimate impacts on quality adjusted prices of new cars. To estimate impacts on quality adjusted prices a hedonic pricing equation will be most useful because this price model takes product characteristics into account. By taking
product characteristics into account, quality adjusted prices can be estimated. In this thesis the model of Goldberg and Verboven will be used to estimate the quality adjusted prices.
An estimated hedonic pricing equation of automobile prices is used with different firm and year dummies and a number of different characteristics. The exchange rate is also implemented in this formula because a change in the exchange rate influences the marginal costs of a vehicle importer. Since the cars sold in Poland are priced in Zloty, while imports are priced in euros, US dollars or other currencies, the prices of new cars which are imported to be sold in Poland can vary due to currency fluctuations. Thus the final sale price in Poland (in Zlotys) is possibly affected by the exchange rate and it should be reflected in the equation.
Goldberg and Verboven (2001) express the regression function in the following way:
Where is the natural logarithm of the new car price (either before tax or after tax)
of price observation i in year t; w is a vector of product characteristics and beta the regression coefficient thereon; m and t are sets of make (brand) and year dummies respectively19; ect is the exchange rate of the exporting country, expressed as units of Poland’s currency per currency of the exporter. The coefficient p is the exchange rate pass through, also called pricing-to-market coefficient. The exchange rate pass through measures the fraction of an exchange rate change that is absorbed by the importer, and it will be estimated using regression. If all exchange rate changes are completely absorbed by the importer then local prices are unaffected to exchange rate shocks and p will have a value of 1. If, in the other case, the complete exchange rate shock is passed on to the market price, p will have a value of 0. The alphas are the regression coefficients on each variable.
To quantify the price change of new cars a variant of the above stated Goldberg and Verboven equation (1) is estimated. Year dummies will be replaced by a trend variable and a dummy variable. This is done to estimate the one time price change. In other words, due to the accession to the EU the normal price trend undergoes a one time price change after which the trend proceeds. The dummy variable then represents the one time price change while the trend variable captures the trend net of the one time price change.
Figure 8 shows a basic example of the one time price change and explains how the dummy variable (mathematically referred to as POST04) attempts to isolate the price change.
Figure 8 – example of one time price change
In the above regression function (1) t will be replaced by TRENDt plus POST04t. By
doing this, the one time price change in 2004 is isolated. The variable Post04 will get the value 0 before 2004 and 1 after 2004. In that way the coefficient of Post04 determines with how much the price change in 2004 and thus the one time price change. The price change is assumed to be structural after 2004, since Post04 stays 1 then as defined above.
Since t is replaced by Post04 and TRENDt, TRENDt is equal to the difference between the old year dummies ( t) and Post04. Thus it still represents the trend as time goes by, but the influence of the year 2004 is isolated by the Post04 variable. The new regression function looks like this:
ct
p
t
t
t
m
m
jt
e
it
w
TREND
POST
e
p
=
'
β
+
α
1
θ
+
α
2
+
α
3
04
+
β
(2)By estimating the coefficient on POST04 (alpha 3) we can quantify the one time price change in 2004. This coefficient will be estimated through linear regression with OLS.
6. Data
prices across different car makes and models are displayed in some European countries. Other data is obtained by contacting the Polish car market research company Samar. Finally different local sources were contacted to obtain the last data regarding specific make/model prices over different years.
Also for the selected car models the product characteristics horse power and engine size are collected.
All prices of new cars of selected makes and models over the last 7 years can be seen in table 3. Overall there is an increase in new automobile prices over the years. Further average yearly exchange rates are collected to apply in the hedonic price model because these influence the cost of the importer.
Based on this data the impact on new car prices will be estimated. This impact will be estimated with regressing a hedonic pricing equation of automobile prices on a set of firm and year dummies and on basis of a set of product characteristics.
Table 3
Prices of new cars in Poland incl. tax over the years 2000-2006 for selected models (prices in Euros) 2006 2005 2004 2003 2002 2001 2000 ALFA ROMEO-166 34336,00 32601,00 29007,00 27058,77 25893,56 23446,83 21194,69 Audi-A8 4.2 qu. 85325,00 85325,00 84919,00 79215,49 75804,29 74979,52 75280,64 BMW-X5 56058,00 59002,00 54447,00 50790,11 48602,98 48074,16 48267,23 Fiat-Panda 1.2 8V DYNAMIC BZ 11990,00 8511,97 8141,00 8121,00 6669,11 6596,54 6623,04 Honda-ACCORD 2.0 SPORT 24229,00 22985,00 20451,00 19077,43 18255,91 18057,28 18129,80
Mercedes-Benz-E 220 CDI Sedan, 2148 cc 6-speed-transmission 47184,00 47102,00 40288,00 37582,09 35963,72 35572,43 35715,29 Nissan-Almera 1.5 5dr 16540,00 13680,00 12233,00 11411,38 10919,98 10801,17 10844,55 Saab-9-5 2.3t Arc 4D 47276,00 43287,00 40484,00 37764,93 36138,68 35745,48 35889,04 Subaru-Legacy 2.0i 26800,00 25300,00 25300,00 23600,75 22584,45 21662,00 19900,00 Toyota-Corolla 1.4L 3dr 15200,00 13188,00 10974,00 10236,94 9796,12 9689,53 9728,44 Volkswagen-Polo 55 PS 5G 2T 12200,00 11110,00 9562,00 8919,78 8535,67 8442,80 8476,71 Volvo-S40 2.0D 136HP 25600,00 22328,00 23477,00 21900,19 20957,12 20729,10 20812,35
The obstacle of this research was to obtain data which was complete and of
significant value. Several companies and governmental institutions were difficult to come in contact with. After the contact was set up finally, response was slow. Some examples are: The company Samar was willing to cooperate and give the basic data of the Polish car market. When more and more specific data was needed and asked for, they told me that this data only could be supplied to Polish companies in the automotive field or Polish Governmental institutions.
Poland’s customs supplied some data concerning the imports of used cars in Poland over a small number of years 2003-2006. Again no further data could be supplied by them since all other data only was in Polish.
Finally the Road Transport Department supplied data which was mainly not applicable because of anomalies and data being missing such as specific models and product characteristics.
7. Empirical Results
As mentioned in the method chapter, the approach of Goldberg and Verboven (2001) will be used to answer the main research question.
To show the impacts on new car prices due to the increased imports of used cars into Poland, a one time price change in the Polish new car prices will be estimated. First regression equation (1) is tested. Since the equation isolates quality ( '
β
jt
w ) and
brands (
α
1mθ
m) from time (α
2tθ
t), the coefficients (represented byα
2t) on the yeardummies show how the quality adjusted price of cars changes in each year. In other words, by isolating quality and car brand effects from the price, a quality adjusted price across years is left. The coefficients on the year dummies then show what the quality adjusted price in each year is.
displayed in figure 9, the blue line represents the before tax trend of the quality adjusted price and the purple line represents the after tax trend of the quality adjusted price. This graph visualizes the year coefficients in equation 1 (see footnote 19).
Evolution of quality adjusted prices of new cars
0 0,01 0,02 0,03 0,04 0,05 0,06 2000 2001 2002 2003 2004 2005 2006 Before Tax After Tax Figure 9
The most remarkable in this graph is the one time price drop in 2004. As well the before as after tax quality adjusted prices of new cars drop significantly. The start of the tremendous decrease in the quality adjusted prices for new cars from 2004 onwards coincidence with the boom in imports of used automobiles.
As the main aim of this research, the price drop needs to be quantified. Equation 2 will be regressed for that purpose, since the 2004 effect is isolated. Table 4 shows the results of this regression.
The results from testing equation (2) confirm that new quality adjusted car prices decreased significantly from 2004 onwards. The estimated price drop is 9,3% of pre-tax prices and 5,2% of after-pre-tax prices.
Table 4 The one time price change
Regression Equation 2
Coefficient of Price before Tax (std) [p-value] Price After Tax (std) [p-value]
POST04 -0,093 (0.029) [0.06] -0,052 (0.025) [0.05]
Exchange Rate 1,008 (0.018) [0.01] 1,001 (0.015) [0.01]
No. of obs. 84 84
R2 0.9281 0.9031
The figures in table 4 represent the linear regression coefficients on respectively Post04 and the exchange rate in equation 2. Thus, they indicate the influence of these factors on the price. The other, non-relevant, factors have been left out. To be more specific, the coefficients on make, characteristics and trend cannot be used to draw a conclusion which is meaningful for this research and they were therefore omitted. Only the relevant and meaningful factors are now shown.
The p-values show the significance of the results. The exchange rate plays a role in the regression with a certainty of about 99%. This certainty is a bit lower for the Post04 factor. In words, the probability that there was a structural break in 2004 (i.e. that Post04 was relevant), lies around 94%.
anything about these upgrades included into the basic packages over the different years, because I do not have complete information about these upgrades. Obviously, these upgrades imply that the quality of the cars increased at the same or lower price, and therefore that the price-adjusted quality price would have decreased even more sharply had they been included in the analysis!
In this thesis the exchange rate pass through was estimated at about 1. An exchange rate pass through of 1 indicates that importers absorb all exchange rate shocks which means that market prices are not influenced. This makes sense after 2004 because barriers of entry were reduced significantly and the official dealers were competing directly with sellers abroad. Before 2004 this could signify strong competition in the domestic Polish market so that importers chose to absorb the exchange rate fluctuations. In other papers in which also the exchange rate pass through coefficient is used it is most of the time estimated lower than 1, especially in automobile market studies. In Goldberg and Verboven (2001) estimated exchange rate pass through coefficients ranges from .16 to .79 for different countries with the overall exchange rate pass through being .46. This means that in their study exchange rate shocks are more passed on to the market price of new automobiles.
8. Conclusion
In this thesis the impact on new car prices due to opening of the Polish market for used automobiles is investigated.
The main aim of this research was to quantify the one time price change of new car prices in the polish market after trade liberalization in Poland. Results show that new car prices dropped after Poland liberalized its trade barriers and used car imports increased significantly
car imports went up 18 times in comparison with the same period one year earlier.20 On the other hand new car sales decreased significantly in the years after the accession of the European Union by Poland. Because the total market composition of sales of cars, new versus used, totally changed it is interesting to estimate impacts on new car prices. I estimated new car prices fell with 9,3% of pre-tax prices and 5,2% of after-tax prices.
Since data collection was difficult there were mainly two limitations to this research. The first limitation was that due to the fact that data was collected from many different sources it was difficult to make a comprehensive and complete overview of all
characteristics that were available per make and model. That is the reason why in the Hedonic Price Equation, used in this research, only two product characteristics are used namely horsepower and engine size.
The second limitation in relation to data, was that a lot of data was missing. Because of this missing data some questions could not be answered.
Example of questions which are interesting to answer in further research are: “What
is the impact on demand for new versus used cars in Poland due to the joining of the European Union by Poland?” To estimate this impact on demand, a nested logit
model can be used. In that specific model used car prices need to be implemented. Since no company or governmental institution could supply useable data on this, this question remains unanswered so far.
Since the market composition in Poland totally changed, another interesting topic for further research is the change in consumer welfare for the Polish consumer.
References
Berry, S. T., “Estimating Discrete Choice Models of Product Differentiation," RAND Journal of Economics, 25, 242-262, 1994.
Berry, S. T., Levinsohn, L, and Pakes, A., “Automobile Prices in Market Equilibrium," Econometrica, 63, 841-890, 1995.
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