Trade and Consumer Prices: The Role of Competitive Transport, Communication, and Distribution Services

The recent spike in consumer price inflation has amply demonstrated that transport, logistics and distribution play a major role in bringing goods from producers to consumers in a timely and cost-effective manner. Conversely, when choke points in the logistics supply chain arise, prices skyrocket (Figure 1). Although these are unusual times with extreme outcomes, services are important for consumers to benefit from trade in goods also in normal times.

Figure 1. Consumer price inflation, USA

Source: OECD Harmonized Indices of Consumer Prices

Price signals are among the most important mechanisms for realizing the gains from trade and trade liberalization. With cost-effective and competitive transport, logistics, distribution and communications markets, price signals are rapidly transmitted from producers to consumers, whereas uncompetitive supply chain services may absorb price signals and fatten the margins of transporters and distributors rather than benefiting consumers.

A recent paper estimates to what extent and how fast changes in international prices are passed on to consumers in OECD countries. It also looks at whether upward price adjustments are faster and more complete than downward adjustments. A general finding is that price signals are indeed transmitted more completely and faster when costs go up than when they go down.

Clothing is a case in point. It is largely imported in most rich countries. Local prices are therefore determined by factory gate prices in exporting countries, transport and logistics costs, the retail margin in the importing country and the exchange rate. The study focused on the pass-through of exchange rate fluctuations to consumer prices and found that it is far from complete while the speed at which fluctuations get absorbed in local prices vary widely across countries.

Oil is an essential input in the transport sector and the price of oil is an important determinant of transport costs (Figure 2). The paper estimates the pass-through and speed of adjustment to changes in oil prices in local transport markets and finds that also in this market the completeness and speed of adjustment vary greatly across countries.

Figure 2. Price changes, fuel and transport, the European Monetary Area

Source: OECD Harmonized Indices of Consumer Prices

E-commerce has vastly broadened consumer choice and led to more frequent price changes and uniform pricing across locations within countries. Recent studies from the US have documented that consumer prices are more flexible and the pass-through of changes in cost factors have increased over time as e-commerce has taken hold. The changes in cost factors studied are commodity prices, gas prices, exchange rate fluctuations and trade liberalization. Cross-border e-commerce extends such gains to international trade, although such trade is yet to reach its full potential, even within the European Union.

Slow and incomplete pass-through is a symptom of market frictions and lack of competition. A study from the early 2000s shows instances where tariff reductions were completely absorbed by the distribution sector, leaving consumer benefits from trade liberalization elusive. Furthermore, this seems to happen more often to products imported from small and developing countries.

The pass-through to consumer prices of input costs, tariffs, taxes, and the exchange rate vary substantially across products within countries and across countries for the same products. The reasons for such variations are complex and multifaceted, but lack of sufficient competition in transport, logistics, and distribution are commonly found to reduce the extent and slow down the speed of pass-through.  Furthermore, a precondition for a thriving e-commerce sector is adequate and affordable broadband connectivity. For this, pro-competitive policies in the telecommunications sector are essential.

To conclude, cost-effective and competitive transport, logistics, distribution, and communications services are closely associated with speedy transmission of price signals from international markets to consumer prices. To fully realize potential gains, trade and competition policy must align to ensure that lower international costs are passed on to consumers.

 

References

Francois, J., & Wooton, I. (2010). Market structure and market access. The World Economy, 33(7), 873-893.

Gomez-Herrera, E., Martens, B., & Turlea, G. (2014). The drivers and impediments for cross-border e-commerce in the EU. Information Economics and Policy, 28, 83-96.

Gonzales, F., H. Kyvik Nordås and M. Lioussis (2021), “Measuring competition in services markets with pass-through and speed of adjustment”, OECD Trade Policy Papers, No. 258, OECD Publishing, Paris, https://doi.org/10.1787/10d92b8d-en.

Gorodnichenko, Y., & Talavera, O. (2017). Price setting in online markets: Basic facts, international comparisons, and cross-border integration. American Economic Review, 107(1), 249-82.