Analyzing Retail Price Trends in the UK: A Study on Trade Margins and Price Changes

1. «Sales prices, replacement prices and trade margins- tracing price changes through the UK retail sector -» Discussion of the paper by Matthew Powell (ONS): 29th General Conference of The International Association for Research in Income and Wealth Joensuu, Finland, August 25 2006 Discussant: Anita Wölfl, CEPII, EHESS

2. 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.

3. Implicit Value added deflators, wholesale and retail trade - total economy is 100 - Source: OECD STAN Database 2002

4. 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

5. … 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

6. 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?

7. 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

8. 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?

9. 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 ?

10. Diverging pattern of sales and replacement cost deflators Source: Based on data in Powell (2006)

11. … and their impact on deflated margins Source: Based on data in Powell (2006)

12. 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.

13. 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’?