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Reasons for high food prices in small market areas: The case of the Åland Islands

Author

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  • Ville Aalto-Setälä

    (National Consumer Research Centre, P.O. Box 5, FIN-00531 Helsinki, Finland. E-mail: ville.aalto-setala@ncrc.fi)

  • Jouko Kinnunen

    (Statistics and Research Åland (ÅSUB), P.O. Box 1187, AX-22111, Mariehamn, Åland, Finland. E-mail: jouko.kinnunen@asub.aland.fi)

  • Katri Koistinen

    (National Consumer Research Centre, P.O. Box 5, FIN-00531 Helsinki, Finland. E-mail: katri.koistinen@ncrc.fi)

Abstract

This article considers the reasons for high grocery prices in a small isolated market. The starting point of our study is the knowledge that the price of food in the Åland Islands-a small archipelago between Finland and Sweden-is significantly higher than in continental Finland. We also know that store-level economies of scale in grocery retailing mean that the structure of a small market is, even in the best case, either inefficient or uncompetitive. The article compares the price level of stores in Åland and Finland. Our aim is to decompose the price differences and allocate them between their various causes. The empirical results of the study are in accordance with the theory: high prices in Åland arise from a small average store size, high concentration in both the retailing and the food processing sector, border taxes, and transportation costs. An additional source of high prices is the strong regional spirit of the Ålanders: they are prepared to pay higher prices for products that are made in Åland. [JEL citations: D430, L110, L810]. © 2004 Wiley Periodicals, Inc. Agribusiness 20: 17-29, 2004.

Suggested Citation

  • Ville Aalto-Setälä & Jouko Kinnunen & Katri Koistinen, 2004. "Reasons for high food prices in small market areas: The case of the Åland Islands," Agribusiness, John Wiley & Sons, Ltd., vol. 20(1), pages 17-29.
  • Handle: RePEc:wly:agribz:v:20:y:2004:i:1:p:17-29
    DOI: 10.1002/agr.10083
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    References listed on IDEAS

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    1. Ronald W. Cotterill, 1999. "Market power and the Demsetz quality critique: An evaluation for food retailing," Agribusiness, John Wiley & Sons, Ltd., vol. 15(1), pages 101-118.
    2. Lamm, R McFall, 1981. "Prices and Concentration in the Food Retailing Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 30(1), pages 67-78, September.
    3. Bearse, Peter M & Bozdogan, Hamparsum & Schlottmann, Alan M, 1997. "Empirical Econometric Modelling of Food Consumption Using a New Informational Complexity Approach," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 12(5), pages 563-586, Sept.-Oct.
    4. Cotterill, Ronald W, 1986. "Market Power in the Retail Food Industry: Evidence from Vermont," The Review of Economics and Statistics, MIT Press, vol. 68(3), pages 379-386, August.
    5. Azzam, Azzeddine M, 1997. "Measuring Market Power and Cost-Efficiency Effects of Industrial Concentration," Journal of Industrial Economics, Wiley Blackwell, vol. 45(4), pages 377-386, December.
    6. Panzar, John C., 1989. "Technological determinants of firm and industry structure," Handbook of Industrial Organization,in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 1, pages 3-59 Elsevier.
    7. Song, Haiyan & Liu, Xiaming & Romilly, Peter, 1997. "A Comparative Study of Modelling the Demand for Food in the United States and the Netherlands," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 12(5), pages 593-608, Sept.-Oct.
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