The “Basil Fawlty Factor”

by Mark Thoma

Why are prices so high in the UK?

Tourists tell Britain: you’re a rip-off, by Jon Ungoed-Thomas, Times Online: ...[W]hy is Britain so phenomenally expensive and why on earth do Britons put up with it? So exercised have tourists and other visitors to Britain become that they have started an internet blog on the subject and the “Basil Fawlty factor” that some hold to be responsible.

Britain’s rip-off prices were confirmed last week by a Sunday Times survey that found we are indeed being overcharged for a wide range of everyday products and services.

Whether it is a meal out, a trip to the cinema or a weekend in the country, in Britain it typically costs about 30% more than in comparable countries. Our train fares are four times the global average.

But what perplexes tourists is not British prices per se but the reasons for them. ... Tyler Cowen, professor of economics at George Mason University ..., said: “England is not the wealthiest country in the world but it has some of the most outrageous prices. It’s an overcrowded country with high property prices, but it doesn’t explain why people have to pay so much.”

Cowen has prompted a lively internet debate on the subject on his economics blog, Marginal Revolution, under the heading: “Why is the UK so expensive?” ...

It is not just the goods and services bought by tourists that are sold at premium prices. From the cost of a mobile phone call to downloading a music track on iTunes or ordering a cup of coffee in a cafe, Britain regularly tops the world league table of the most expensive countries. Our transport costs are also among the highest....

Although London is well known for its spiralling prices, the problem is far from contained there. Anyone heading for the seaside is likely to find accommodation and food prices to rival the capital’s. ...

Daniel Kalt, head of economic research at UBS, said the strength of the pound and the housing boom contributed to the higher prices. He said the introduction of the euro in other EU countries had meant greater price competition there. Britain’s relatively high wage packets were another factor.

But contributors to Cowen’s website are not all convinced, not least because the boom in house prices has been a world-wide phenomenon. Britain is also well known for having benefited disproportionately from an influx of cheap eastern European labour that would normally be expected to keep prices down.

Instead they propose a more straightforward explanation. “British consumers are used to being mistreated and cheated,” says one contributor to the debate. “What surprises many American visitors is how seldom locals make a fuss about bad service or poor quality goods.”

Economists agree that the willingness of Britons to be charged higher prices may be a factor. Alena Kozakova, principal economist at the consumer magazine Which?, said: “Consumers are more demanding in the US and aren’t prepared to be overcharged. ...

However, Gary Goodman, marketing director of Pricerunner, said the ease with which British customers could now compare prices was likely to drive down high profit margins and there was already good news for customers. “If you look at the costs of CDs, DVDs and books, we are now actually nearly the cheapest in Europe,” he said.

Update: I just realized this was covered here already under "Nine reasons why London is so expensive."

Comments

[Ian D-B]

I don't get it. If every price in the UK is high, then that's just inflation. But the article doesn't seem to be talking about normal inflation where every price goes up, right? So it must just be a subset of prices? What things are expensive? The article says it's not just things sold to tourists. I'm confused.

[Chris]

I'm dissatisfied by this explanation as well. What about the free market? Wouldn't one smart guy lower his prices a little and see his sales go through the roof? Is it because they don't have 5% of their workforce as illegal immigrants (like the USA)?

[Mark Thoma]

So you don't think saying "some things are more expensive in other countries" says much? Can't disagree with that.

I cut quite a bit about which prices - the original article has quite a bit more. Some things I left out:

"Whether it is a meal out, a trip to the cinema or a weekend in the country, in Britain it typically costs about 30% more than in comparable countries. Our train fares are four times the global average." ...

"It is not just the goods and services bought by tourists that are sold at premium prices. From the cost of a mobile phone call to downloading a music track on iTunes or ordering a cup of coffee in a cafe, Britain regularly tops the world league table of the most expensive countries.

Our transport costs are also among the highest. A return rail ticket from London to Manchester for travel before 9.30am costs £202, or £57.10 after 9.30am, compared with £27.42 for a train journey of a similar distance between Paris and Dijon. And taxi costs in London are almost double those in Paris.

A survey on prices and earnings around the world published this month by the banking group UBS found that a 120-mile train journey in Britain was 65% more expensive than any other similar train journey in the world.

Although London is well known for its spiralling prices, the problem is far from contained there. Anyone heading for the seaside is likely to find accommodation and food prices to rival the capital’s.

In Padstow, Cornwall, for example, it costs about £600 to rent a cottage for four for the week. A meal in a family restaurant starts at around £25 a head and to eat somewhere fashionable, such as Rick Stein’s Seafood Restaurant, you can expect to pay £65 per head for a set meal, and with the cheapest starter, mackerel stuffed with masala paste, costing £9.50." ...

"In Tuscany, Italy, many Britons holiday in the hills near Pisa where apartments for four cost as little as £250 a week. Superb restaurant meals can be bought for less than £15 a head.

Holidaymakers on the Continent also enjoy cheaper fresh produce. “I was surprised to buy three bags full of vegetables, with aubergines, pears, peaches, peppers and bananas, for just under £7,” said Linda Watson, a Plymouth University lecturer who is on holiday in Ronda in Andalucia.

Fresh fish and meat are also much cheaper in much of Europe and America.

Bargains can be found “off the beaten track” in Britain but most visitors are dismayed by the prices of some of the most popular attractions. For example, Madame Tussauds costs £22.99 in London, compared with £15.40 in New York and £12.10 in Amsterdam.

Jorge Jove, 49, from Barcelona, who was among the tourists visiting Madame Tussauds on Friday, said: “It’s very expensive compared with Spain. As you spend £1 here you would pay in Spain €1. Everything just costs too much. We’ve been eating hamburgers to save money.”

It is not just the holidaymakers who are feeling the squeeze. Broadband costs in the UK are still among the highest in Europe and the cost of making a mobile phone call can be twice as expensive as on other European networks."

[Blissex]

Well, this is not too different from Japan.

I personally reckon that the main reason is highly expensive real estate, which limits competition. Location, location, location.

Despite enjoying much lower import prices thanks to chinese supply, many/most shops in Britain, with a couple of notable exceptions, have not lowered retail prices, because there is little competition dues to limited availability of shopfronts in valuable places. So I suspect that a large chunk of the benefits of improved margins are actually being captured by landlords.

Given limited competition via scarce real estate, prices don't go down also because of a rather unequal distribution of income, which comes with a lot of class based distinctions in shopping. There is an nice discussion of class based shopping and price insensitivity in "Watching the English" by Kate Fox, page 232:

«Many other aspects of shopping, however, are deeply entangled in the complexities of the English class system. As might be expected, where you shop is a key class indicator.»

In other words, the British tendency is to conspicuous consumption, at most levels of income. So the book mentions the test of what people buy at Marks&Spencer, and amusing quote here:

«The upper-middle classes buy food in the very expensive but high-quality M&S good halls [ ... ]» «"My sister-in-law buys all her veg and washing-up liquid and everything from Marks, stupid cow," a middle aged woman told me, with a disdainful, disapproving sniff. "It's just showing off -- thinks she's better than us."»

Most brand marketing is thus consciously aimed at specific classes (usually ''aspirational''), and this allows providing poor value at all price points.

One of my favourite examples is sausages (after "Yes Minister"): you can buy cheap sausages with very little meat in them, somewhat expensive ones with some meat, and rather expensive ones actually made with mostly meat.

Then people with high income in Britain (largely in finance or in protected professions or landlords and investors) do so well and are so snobbish that they want and can pay whatever. As in Japan. This drives up most prices.

[canyonal]

here in north america we have the lowest prices and not surprisingly the lowest quality. unaldulterated food is nearly impossible to buy, organic is a $50 certificate issued by anyone who cares to print the certificate. sugar is present in every food item.
cars are poor quality and designed with decades old market perceptions.
it may not be businesses at fault. consumers here have CHEAP imprinted in their genes. quality is sadly missing. BUT the british lack the gene for quality service.
i recently visited a waitrose food hall in the uk. show me a store like that in north america... high prices and very high quality.

[John B. Chilton]

I, too, read and thought of Japan. Which made me think - where is Walmart? Is it difficult for a retail innovator to enter the market, to implement the strategy of implementing a no-frills large-scale retailing? Often Japan's contorted retail system of small shops is due to regulation. But could it be that there's something about crowded old islands that makes it difficult to transform the retailing system?

[Blissex]

«But could it be that there's something about crowded old islands that makes it difficult to transform the retailing system?»

The «crowded old island» theme is also what Kate Fox says as to some similarity in English and Japanese attitudes.

But I think that's quite incorrect. I detect more similarity overall between Italy, a crowded mountainous peninsula with no natural resources and lots of earthquakes, and Japan, a crowded mountainous island with no natural resources and lots of earthquakes. Compared to Italy or Japan the British Isles are vast, underpopulated (no mountains!), rich of natural resources, with fairly mild weather.

The main difference between Italy and Japan and similarity between England and Japan is that Italy is a part of the central isthmus (ref. Braudel) of the European continent, and a peninsula at the crossroads of the Old World and its sea, subjected to frequent invasions and upheavals, and both Japan and England are out-of-the-way islands very rarely invaded.

My interpretation of English attitudes and some similar Japanese attitudes is based on:

* Most importantly is the legacy of the feudal system, and the lack of a ''french'' revolution in both countries.

* That neither country has been invaded very much, resulting in fairly high security and ''respect'' for the respective ruling classes, and in particular the local ''lords of the manor''.

This tends to mean that consumption is conspicuous because it has class connotations; haggling on price or looking for a bargain is ''common'', because it would be beneath the ''lord of the manor''; except for impoverished ones, who would hide it.

Landes in his fabulous book remarks that the Japanese conceive of a market not as an open space, but as a set of enclosures, and that is what the Japanese retail system still looks like. England also had a byzantine retail system until relatively recently, with infinite degrees of restraint of trade.

[David]

I have lived as a "poor student" in both Tokyo and the UK and I must say that I find Tokyo cheaper than e.g. Cambridge or Winchester and much much cheaper than London.
Cheap but good food in Tokyo: about 400 yen = £1.8
Cheap but good food in Cambridge: £4
Room in shared appartement 10 minutes by underground from the centre of the centre of Tokyo (Shinjuku): 5000 yen = £227 per month
Student room in Cambridge: £280 per month (very low standard)
Train fare from a town about 1 hour from Tokyo the the centre: 1000 yen = £4.5
Train fare from Cambridge/Winchester to London (about 1 hour): £17 pounds

An the train in Japan is always on time while the UK must have the worst public transportation in western europe!

About retail, there are 100 yen shops everywhere in Tokyo where you can get cheap stuff. The UK has Argos, which I think is a great chain (you almost think it must've been invented by the japanese!) but it's only good for products in the £10+ price range.

All purely anectdotal of course....

[AC Mitchell]

John B Chilton: "Which made me think - where is Walmart? Is it difficult for a retail innovator to enter the market, to implement the strategy of implementing a no-frills large-scale retailing?"

There is such retailing in Britain, but it is run slightly differently from Wal-Mart -each supermarket chain will have its own version of a 'value' product, which will sell everyday 'essentials' extremely cheaply. However, this feeds into the class idea others have discussed in an intersting way; the same store will also have a 'luxury' brand. There is an important psychological difference between looking in one's cupboards and seeing only products from a single, cheap store (eg, Wal-Mart) and looking in one's cupboards and seeing only the cheap things from a store which serves a wide variety of customers.

Incidentally, the advertising of all the above types of product (cheap, middling and expensive) is almost exactly along the 'Yes Minister' lines described above.

[Doug]

Just to say that Walmart has a huge presence in the UK after buying Asda. It's second only to Tesco.

[AC Mitchell]

That's true, and Asda does tend to trade (as it always has) on being massively cheap. There isn't one near where I live so I don't know if it splits up its products in the way I described -if not, the fact that its market share is increasing might be a sign that the UK is moving more towards the pile high, sell cheap model.

[RC Brooks]

Having moved from the US to London about a year ago, the thing that strikes me is how difficult it is to shop here. In the US, if you want something, you hop in the car, drive 5 minutes to the store and buy it. If the price is too high, you drive another 5 minutes to another store and buy it there. In London, it's conceivable that you could drive, though after spending an hour in traffic, you'd have to spend another hour looking for parking. Otherwise, taking public transport, you're limited to a certain number of shopping areas and it stills takes forever, plus it will cost you 5 pounds, or 10 dollars to get there. The rather abysmal state of the transportation network here significantly increases the cost of comparison shopping.

[ChrisA]

I am a UK national, but have lived overseas for the past 10 years, (US, Caribbean and Middle-east) and my personal experience is similiar to that of many people here, i.e. that the UK is one of the most expensive countries in the world for housing, eating out and hotels. In addition the quality of these services tends to be lousy as well, especially the hotels. However some things, eg supermarket food, clothes and capital goods, once you adjust for VAT, are not too bad, except compared to the US. It is strange because wages in the service sector are not high. The conclusion I have come to is that this is the result of the UK's highly restrictive planning laws/process, which I believe are probably the tightest in the world. It can take months to get the slightest change made to a property (eg adding an extension). Getting change of use of a property from a residential or agricultural to commercial use takes years, is very expensive, complicated (for experts only) and often fails. The impact is to considerably slow competitive forces in the hotel and restaurant trade, because new players are highly discouraged from entering the market due to the risk. Effectively the existing providers become a cartel. This is a different argument that many are making here and on the other blog of saying that the high cost of property is the cause of expensive Britain, that to me is a small part of the problem that could easily be resolved by having smaller hotel rooms for instance (as they do in Paris or NY) so as to have more on the same real estate. To put my argument another way - imagine how hotel room prices would fall and service improve if Holiday Inn and Hilton could place a new hotel in the centre of every provincial town in the UK tomorrow. I think this situation continues because by and large the individual in the UK is not a large consumer of hotel and dining services, but of course, is a beneficiary of the restrictive planning laws if they own their own home. The thing that convinces me that the planning issue and not a "cultural one" is the real root cause is the airline trade - which is highly deregulated in the UK at the provincial airport level - this sector is one of the cheapest and most customer focused in the world.