The Different Prices in IKEA of Same Product in Different Countries - Essay Example

After converting the price in USD, the price of 365 + Gnistra Bread knives in Canada has become 17.4532 USD and in Australia, the figure is 18.2721 USD. So, Australia’s cost for this particular product is expensive compared to the other two countries (IKEA Systems, 2011). Question 2 What might be the reason for the prices to differ even after conversion to U.S. dollars? Individual product costs differ from one country to another. The conventional reasons for the difference in the price level are the exchange rates and prices of labor. Wage distribution at the mean level has a significant negative effect on product prices.

The high currency conversion rate of various countries is related to higher prices. The high-income generating countries enjoy large productivity advantages (Lipse & Swedenborg, 2007). Trade cost can determine the cost of the product. Trade cost has two components, one being transportation cost and the other being distribution cost. The intensity of transportation costs varies from country to country which in turn can determine the cost of the final product. Transportation costs can further be divided into two categories namely direct transportation cost and indirect transportation cost.

The direct transportation costs are freight charges and insurance charges and indirect transportation costs are holding costs, stock costs, and preparation costs (Inanc, 2010). The indirect taxes imposed on products sold in various countries are another reason for price differences between countries. Every country has its trade barriers on individual products; which is an important reason for the price differences. Besides these factors, the customers’ needs and preferences, government regulations, and the availability of raw materials can affect the prices of products in different countries (Inanc, 2010).

Question 3 Why should you expect the prices to be the same? There are different exchange rates in different countries. The prices of the same product should be the same in different countries because if there is a price difference between countries, people might take benefit from it. They will buy products in cheap markets and might sell them in comparatively expensive markets. These people are known as ‘Commodity Arbitragers’. For this reason, there are tariff restrictions in different countries.

When these tariffs are applied equally to potential sources, they cannot cause price differences. The ‘Law of One Price’ theory provides the answer that prices are the same when they are in different foreign currencies. If the price of the product is converted into a common currency like USD in the absence of shipping cost, tariff rate, and other local sales tax the figure will be the same in every country. Because of the above factors, there are different prices in different countries and various trade restrictions (Levi, 2009).