Economics, 3rd Edition

Reduction in Price Discrimination 

It is sometimes argued that a second albeit indirect gain to the 

 members of a common currency area results from the reduction in price discrimination that should ensue 

when there is a single currency. If goods are priced in a single currency it should be much harder to disguise 

price differences across countries. As we have discussed, price discrimination involves a  deadweight loss 

to society, so this is a further gain from a single currency. This argument assumes that the transparency in 

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CHAPTER 36  COMMON CURRENCY AREAS AND EUROPEAN MONETARY UNION  763

prices that results from a common currency will lead to arbitrage in goods across the common currency 

area: people will buy goods where they are cheaper (tending to raise their price in that location) and reduce 

their demand for goods where they are more expensive (tending to reduce the price in that location).

Overall, however, EMU seems unlikely to bring an end to price discrimination across euro area  countries. 

For items like groceries, having a single currency is unlikely to be much of an impetus to price convergence 

across the common currency area because of the large transaction costs (mainly related to travelling) 

involved in arbitraging, relative to the prices of the goods themselves. Would you travel to another country 

to do your grocery shopping if you knew the prices there were lower? Perhaps you might – when it is easy 

to travel this does happen. Doing so across the whole of the EU means that the effects are necessarily 

more limited. On the other hand, big ticket items like household appliances and electronic goods, where 

the transaction costs may be lower as a percentage of the price of the good in question, are also unlikely 

to be arbitraged heavily across national borders by consumers because of their durable nature and the 

need for confidence in after-sales service. Would you want to buy a fridge-freezer in a foreign country and 

run the risk of having to take it back or get someone from there to fix it for you if it goes wrong? In addition, 

the fact that different countries in the EU still have different plugs and power systems, which are difficult 

to harmonize, might also reduce the overall impact.