Why the same product can be found on sale at different prices
While, at face value, price differences may initially appear to be unfair or unjustified, they are often a natural and expected outcome of market forces at work
Some consumers assume that competition naturally leads to uniform prices. They argue that if businesses sell the same product, prices should be the same. In reality, price differences, also known as price dispersion, are common, even in competitive markets.
Consider the following simple example: two bakeries in the same town are selling identical loaves of bread of equal weight but one bakery is charging more than the other. The Office for Competition occasionally receives complaints about such businesses charging different prices for identical products, leaving consumers puzzled about why this happens.
The first lesson in economics sheds some light on this dilemma. Prices are driven by supply and demand. When demand is high and supply is low, prices rise, whereas an oversupply tends to push prices down, all else being equal.
In theory, stronger competition should lead to lower prices and a narrowing of price differences. This happens mainly for two reasons, among others. First, in highly competitive markets, high prices attract new businesses, increasing supply and putting downward pressure on prices. Second, economic theory, particularly so-called Bertrand competition, suggests that firms are forced to lower prices to attract consumers and gain market share, ultimately driving prices closer to marginal cost and reducing price dispersion.
However, empirical studies show that price dispersion does not necessarily disappear with more competition. Some scholars argue that increased competition helps reduce price differences, while others find that prices can still vary widely, even in highly competitive markets.
There are several possible reasons for price dispersion. One key factor is information asymmetry. Not all consumers have access to the same price information. Some may unknowingly pay more simply because they are unaware of lower-priced alternatives, while others are less willing to search and have better price information due to high search costs involved. Some might also be uncertain about the true market price. As a result, businesses may choose not to compete solely on price but instead focus on non-price factors, such as branding, convenience, loyalty programmes and after-sales service to attract and retain customers.
Price dispersion does not necessarily disappear with more competition
Another source of price dispersion is firm heterogeneity, meaning businesses are not identical and incur varying costs, which are ultimately reflected in their pricing.
For example, a bakery in a prime location may charge higher prices to cover its higher rent, while a bakery on the outskirts, which likely faces lower rent, may offer lower prices to attract more customers. Additionally, some bakeries may choose to invest in complementary services, such as adding a cafeteria or offering an in-store experience, further justifying the existence of price dispersion.
Retailers often also add different markups to their costs, which further causes variations in prices, even for the same or similar products. A markup is the difference between the cost of a product and its selling price, and it represents the profit margin a retailer aims to achieve. The markup a retailer applies can vary significantly depending on the pricing strategy, cost structure, product differentiation and market conditions, among others.
Considering these factors, if prices were identical, it may suggest coordination between suppliers. One form of coordination occurs when a firm assumes the role of a leader (possibly a dominant or the largest firm), with the other firms acting as followers. In this case, the leader sets the price, and the followers either adopt the same price or set a similar one, as they conclude that doing so is more profitable than deviating from the price set by leader. This type of leader-follower behaviour is not automatically deemed harmful or anti-competitive, as it could be a natural consequence of market dynamics. However, identical prices could also be the result of collusion, where companies collude to fix prices and limit competition to the detriment of consumers.
While, at face value, price differences may initially appear to be unfair or unjustified, they are often a natural and expected outcome of market forces at work. Rather than immediately assuming that price differences are indicative of unfair practices, consumers should recognise that such variations can reflect the normal functioning of a competitive marketplace. In many cases, price differences are driven by legitimate business strategies that respond to specific market conditions or consumer segments.
A way to navigate price differences effectively is for consumers to be informed. By understanding the underlying reasons for price variations, consumers can make more educated decisions when shopping. Being informed is the best way consumers can benefit from competitive markets.
Melchior Vella is a director at the Malta Competition and Consumer Affairs Authority’s Office for Competition.