The role of transport costs as a determinant of price level differentials between the Isle of Man and the United Kingdom

The Isle of Man experiences price levels which, for consumer convenience goods, are some 10% higher than those in nearby regions of the UK mainland. The observed price differentials indicate incomplete economic integration with the United Kingdom. This paper presents the results of two major research projects undertaken on behalf of the Isle of Man Board of Consumer Affairs by a team of researchers at Lancaster University. The research analyzes the role which transport costs to the island play in determining the observed price differentials between the Isle of Man and the United Kingdom. Transport costs (both marine and road haulage) were found to account for only a relatively small part of the observed price differentials. Other major causes of price differentials between the island economy and the mainland were found to include: high stockholding and inventory costs; the failure to exploit economies of scale fully in the on-island wholesaling and retailing sectors (as a result of small market size); and imperfect competition among island business sectors. The study highlights the difficulties faced in integrating island and mainland economies. Freight transport improvements alone cannot eliminate price differentials.