Markets, Strategies, and Rivalries
Edited by Jens Gammelgaard and Christoph Dörrenbächer
To study the process of domestic market integration in Lao People’s Democratic Republic (hereafter Lao PDR), this chapter explores the spatial variation in beer prices and its relationship with transport costs and various local market characteristics. More specifically, we study how the price of a 640 ml bottle of Beer Lao varies across the country. In a well-integrated market, we expect the law of one price to hold. Controlling for transaction costs, a homogeneous product should have the same price throughout the market. Sellers trying to charge a higher price will find that potential buyers turn to competing suppliers. Those starting out with a lower price will meet high demand and realize that they can maximize their profit by raising their price. Well-integrated markets where price signals are rapidly transmitted across space are more efficient, since both consumers and producers are better able to adjust to changes in supply and demand conditions. In reality, however, markets are not perfectly integrated. Natural or man-made obstacles to economic interaction, such as lack of transport routes, excessive transport costs, or formal trade barriers, may block information flows and arbitrage.
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