« 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 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 Source: OECD STAN Database 2002

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)

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

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’?