«Sales prices, replacement prices and trade margins- tracing price changes through the UK retail sector -»

29th General Conference of The International Association for Research in Income and Wealth

Joensuu, Finland, August 25 2006

Discussion of the paper by Matthew Powell (ONS):

Discussant: Anita Wölfl, CEPII, EHESS

Why looking at retail sale prices and margins

• Wholesale and retail trade is an important sector:

– UK: wholesale and retail trade accounts for about 10% in total production,

– Retail prices are the source of most consumer prices.

• Main area of problems of price measurement

– Current practice: assume a direct relationship between sales and retail price indices, ...

– … an assumption which is not necessarily true, ...

– … and disregards changes in the quantity/ quality of retail services themselves.

Implicit Value added deflators, wholesale and retail trade - total economy is 100 -

Source: OECD STAN Database 2002

70

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13019

80

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Austria

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Finland France

United StatesCanada

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199

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A good start - the paper setup ...

• Step 1: Definition of margins and its discussion

• Step 2: Theoretical derivation of how to construct margin volume indices

• Step3: Formal discussion of how margin volume indices are estimated in practice and the biases that may result from it

• Step 4: Empirical analysis

– pattern of different price indices and deflated margins using these deflators

– regression analysis of the role of products sold versus retailers for margins

• Step 4: Conclusion and implications

… but room for improvement in the detail

• The style of the paper

– the reader matters,

– precision, detail, clarity, ...

• The line of argumentation

– What are the points raised?

– Are these thoroughly discussed in the theoretical and empirical analysis?

– What about alternatives?

• => Discussion by presenting the paper in more detail

What are trade margins?

• Definition in the SNA (1993):

– Trade margin: “the difference between the actual or imputed price

realized on a good purchased for resale and the price that would

have to be paid by the distributor to replace the good at the time it is

sold or otherwise disposed of.”

• Raises three issues:

– not necessarily a proportional relationship between sales price index and constant price margins, instead: difference between two prices => double deflation preferable?

– “replacement” price matters and not the price that a retailer actually paid for purchasing the good => existence of a price pipeline?

– margin = price of the retail service => measurable as such?

How to compute the volume index of trade margins? I

• Based on volume index of sales

– volume index of margins = index of sales volumes weighted by base period margin values.

– ~ way in which margin volumes are computed in practice

• Based on double deflation

– volume index of margins = difference between current sales deflated to the base period sales and current replacement costs deflated to base period replacement costs

– ~ theoretically closest to the definition in SNA

How to compute the volume index of trade margins? II

• Argumentation in the paper:

– Both ways to estimate margin volumes may be subject to biases.

– Extend of biases depends on

• covariance between the current price margin and the resale quantity index

• covariance between resale/replacement price and quantity index.

– Double deflation better: “extra bias arising from the use of sales weighted indices … as opposed to margin weighted indices”.

– Which way would create smaller bias is then an empirical question.

• Questions:

– Is it really the “sales weighted” versus the “margin weighted” that is relevant, or the lack of consideration of changes in the margins over time/ real margin index?

– “Bias” judged to which reference?

What do the data say ? I

• The data

– Retail Sales index (RSI): ONS’s survey of retail activity:

• monthly turnover inquiry for 27 NACE groups

• deflators for 44 different COICOP groups, calculated with data from the Retail Price Index (RPI)

– Annual Business Inquiry (ABI) 2000

• Questions

– “RSI makes no attempt to measure double deflated trade margins or to measure replacement costs.” - how are replacement costs estimated in this analysis?

– Data comparability ?

Diverging pattern of sales and replacement cost deflators

Source: Based on data in Powell (2006)

90

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Sales Deflator Replacement Deflator

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… and their impact on deflated margins

Source: Based on data in Powell (2006)

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Sales deflated margin Replacement deflated margin Double deflation

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What do the data say? II

• Correlations and regression analyses

– current price margins are positively correlated with growth in quantities deflated by sales/replacement deflator

– sales/replacement price deflators are - to a similar extent - negatively correlated with growth in respective quantities.

– not the products sold matter most for determining current or constant margins, but the firms who sell them.

• Argumentation

– The results would speak against estimating margin volumes based on sales volume indices only and against the existence of a price pipeline

=> double deflation would be preferable

– paradox: current price margins grow despite the stronger growth in replacement prices than in sales prices.

What do the data say? II

• Discussion

– Not necessarily paradox : depends on difference in relative level and development of resale and replacement price indices.

– Empirical results may speak against sales based margin volumes,

but do not necessarily favour double deflation as the better alternative

• Theory versus practice once more (data needs, complex estimation of replacement costs)

• Also double deflation is based on price indices of the goods purchased and sold

– What about a ‘real price index for the retail service’?