4 - Economies of scale and greater competition mean US retailers sell for smaller margins

Posted on 12 Jul 2007 at 11:12

Verdict: <strong>False</strong>

Considering the UK has roughly a sixth of the population of the US, we can't possibly expect to benefit from the same economies of scale, manufacturers regularly claim. A sleight of hand, according to our economics gurus. "The US is a huge country and certainly has economies of scale, but we're buying it in from America, so it should be the same price - it should even make the software cheaper overall," says Pentecost. "Economies of scale are only limited by the size of the market, and by selling US software vendors [in the UK] are expanding the market and should be getting greater economies of scale."

These cost-sharing measures are particularly key for the fixed cost incurred during development - you build the program only once - but even with ongoing costs there's no reason why Europe couldn't enjoy savings from large-scale production. "If you're doing a print run of CDs of, say, 300,000, there's no reason you couldn't have some CDs in that print run that are going to be distributed to more than one country, so the cost needn't be higher in one market than in other areas," says Grous. Much of the software media sold by the major software companies in Europe is manufactured in Germany, which also scuppers claims that transatlantic shipping costs add to the retail prices.

On a retailer level, the UK, according to the Professional Computer Association, has up to 10,000 computer retailers and builders, and the smaller shops are obviously working on tiny orders, but this shouldn't affect the prices of Amazon or other big online stores, which buy in bulk. "As a business, we trade at a very similar level to our rivals in the US," claims Jonathan Wall, CEO of etailer dabs.com. "We sell for very similar margins to them and so I don't think they're particularly more competitive than us." Again, much depends on wholesale pricing.

Back to 'Rip-off Britain: excuses exposed'.

Author: Stewart Mitchell