High Price Island Switzerland? on the Reasons Why Consumer Electronics Are an Exception to the Rule
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Master Thesis High Price Island Switzerland? On the Reasons why Consumer Electronics are an Exception to the Rule by Lara Eggimann Bürgstrasse 1 3700 Spiez Tel. +41/79/342 76 26 Student No.: 08-215-758 supervised by Prof. Dr. Dirk Morschett Chair for International Management Fribourg, June 15, 2017 Table of Contents 1 Table of Contents List of Figures................................................................................IV List of Tables..................................................................................V List of Abbreviations.....................................................................VI 1. Introduction................................................................................1 1.1. Problem Statement.......................................................................................1 1.2. Objective........................................................................................................2 1.3. Procedure......................................................................................................2 I Theoretical Background...........................................................................................3 2. The Theory of Price Determination..........................................3 2.1. Origins of Modern Price Theory..................................................................3 2.2. Porter’s Five Forces Model.........................................................................5 2.3. The Impact of Market Structures on Prices...............................................6 2.4. Influence Factors on Prices in a Nutshell..................................................8 3. Pricing Strategies....................................................................10 3.1. Cost-based Pricing.....................................................................................10 3.2. Competition-based Pricing........................................................................12 3.3. Demand-based Pricing..............................................................................14 4. Global Supply Chains..............................................................17 4.1. Structure of Distribution Channels..........................................................17 4.2. Barriers to International Trade..................................................................18 4.3. Price Discrimination and Arbitrage..........................................................19 II Results.....................................................................................................................22 5. Research Design and Methodology.......................................22 5.1. Research Design........................................................................................22 5.2. Research Instruments................................................................................23 5.3. Data Analysis..............................................................................................25 Table of Contents 2 6. An Introduction to the Consumer Electronics Market..........26 6.1. Definition of Consumer Electronics.........................................................26 6.2. General Price Level, Turnover and Growth Comparison.......................27 6.3. Development of Retail Prices....................................................................30 7. Intensity of Rivalry among Competitors................................31 7.1. Retail Competition and Market Concentration........................................31 7.2. Threat of Market Entry...............................................................................36 8. Bargaining Power of Suppliers..............................................37 8.1. Supply Chain Structures...........................................................................37 8.2. Anticompetitive Agreements and Antitrust Law.....................................39 8.3. Threat of Substitutes and Supplier Switching Cost...............................40 9. Bargaining Power of Consumers...........................................42 9.1. Price Transparency....................................................................................42 9.2. Price Sensitivity..........................................................................................43 9.3. Brand Loyalty..............................................................................................44 9.4. Standards of Quality and Service.............................................................45 10.Strategic Decisions and Innovation.......................................47 10.1. Innovative Drive..........................................................................................47 10.2. Switzerland as a Test Market.....................................................................48 10.3. Price Pressure of Loss-Leader Offers......................................................49 11.Trade Barriers..........................................................................51 11.1. Tariff Barriers to Trade...............................................................................51 11.2. Non-Tariff Barriers to Trade.......................................................................52 12.Cost Structures........................................................................55 12.1. General Cost Drivers in Switzerland........................................................55 12.2. Comparison of Cost Efficiency.................................................................58 Table of Contents 3 13.Discussion...............................................................................60 14.Conclusion...............................................................................66 Bibliography..................................................................................67 List of Interview Partners.............................................................86 Appendix A: Interview Guide.......................................................87 Appendix B: Expert Interviews Transcription............................91 List of Abbreviations 4 List of Figures Figure 1: Structure of the Thesis...................................................................................2 Figure 2: Influence Factors on Price.............................................................................8 List of Abbreviations 5 List of Tables Table 1: Development of Turnover in Switzerland.......................................................28 Table 2: Turnover of CE and Apparel Companies in Switzerland 2015......................32 Table 3: Effects of different Factors on Price Differences...........................................61 List of Abbreviations 6 List of Abbreviations ASEAN Association of Southeast Asian Nations CE Consumer electronics CHF Swiss Franc DVD Digital Versatile Disc EA-15 Euro Area, comprising Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Greece, Slovenia, Cyprus, Malta EA-19 Euro Area, comprising EA-15 countries plus Slovakia, Estonia, Latvia, Lithuania EFTA European Free Trade Association, comprising Switzerland, Norway, Iceland, Principality of Liechtenstein EU European Union EUR Euro FTA Free trade agreement GATT General Agreement on Tariffs and Trade IT Information Technology ITA Information Technology Agreement MERCOSUR Mercado Común del Sur, economic and commercial group of coun- tries in South America MNC Multinational Company OECD Organisation for Economic Co-Operation and Development PC Personal Computer TCO Total Cost of Ownership VAT Value added Tax Introduction 1 1. Introduction Since the first gramophones and radio transmitters hit the European market over a century ago, consumer electronics have changed our lives. And the sector is still changing our daily routines with the advent of smart phones, smart cars or smart homes. Innovation and change are the only constant of this multifaceted business sector. Consumer electronics literally became a part of our culture. Swiss are said to have a great affinity for technology. Almost no other nation spends in average as much for consumer electronics as Swiss people (Müller 2014). This is not only due to a high purchasing power: also, the prices for consumer electronics are very competitive in Switzerland compared to European countries. Currently, the price level for consumer electronics is exactly the same in Switzerland and in the Eu- ropean Union (EU). In previous years, the price level was even lower in Switzerland than in EU average (Eurostat 2016a). This is particularly interesting since Switzerland is commonly known for a high price level. From apparel to food and near-food prod- ucts, newspapers or medicine – prices are significantly higher in Switzerland for al- most every product category. The Swiss even invented an expression for their high price level and call their country an island of high prices. 1.1. Problem Statement High prices in Switzerland are a main disadvantage in a competitive international environment. When arguing about the reasons for higher prices in Switzerland, the high income level is often the main focus of discussion. This argument does not seem to hold for consumer electronics. Consumer electronics aren’t more expensive in Switzerland in comparison with European countries. However, the reasons for this remain unclear. Up to now, there are only assumptions why the price level of consumer electronics is so low in Switzerland. There are some studies that give rough indications on possible