One More Reason Why Switzerland Is So Expensive

There are many theories on why the prices of certain goods and services are so high in Switzerland. A well-known economic phenomenon can be added to them.

Theories that help to explain Switzerland’s high prices include, import restrictions and tariffs on products in protected industries like agriculture, high Swiss operating costs, anticompetitive deals struck by international companies that impose higher prices on Swiss retailers and prevent local retailers sourcing their goods abroad, and a lack of domestic competition.

A lack of retail competition is a significant problem in Switzerland in some sectors. The main two Swiss supermarket brands have been allowed to buy up businesses in adjacent areas, for example Fust (Coop), Interdiscount (Coop), Jumbo (Coop), Denner (Migros), Obi (Migros), SportXX (Migros), reducing retail competition further. According to Statista, Switzerland’s two big retailers accounted for more than 80% of the Swiss retail market in 2018. And while the entry of low cost supermarkets from abroad, most notably Aldi (5%) and Lidl (3%), has added some degree of competition to Switzerland’s grocery market, Migros and Coop have the advantage of a lock on many of the best retail locations.

However, in addition to all of these reasons there is another that is sometimes overlooked, a phenomenon known in economics as price stickiness.

Price stickiness describes the resistance of prices to changes in the market. Price stickiness tends to operate in one direction. Prices typically rise more easily than they fall. Reducing prices downwards means reducing margins. So retailers are reluctant to do it unless they are forced to, usually by competitors lowering their prices.

So why would price stickiness hit Switzerland harder than other nations? The key reason is a significant rise in the value of Swiss franc, which has significantly reduced the price of imports to a degree unseen in most other nations.

The Euro has lost more than 30% of its value against the Swiss franc since its peak in 2007 and the US dollar has lost close to 50% of it value against the Swiss franc since peaking in 2001. However, the full effect of these exchange-rate based discounts has in many cases failed to trickle through to Swiss consumers because of price stickiness.

Essentially, a rising Swiss franc has allowed Swiss retailers to quietly let margins rise relative to those in nations with weaker currencies. And, Switzerland’s limited retail competition, something that might nudge retailers to pass on some of the lower import costs brought by a strong currency, has made this easier.

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