Martin Pánek is in China - and his notes from there are very interesting. We already had his article here about who actually harms a cheap Yuan, now we have for you article about why Coca-Cola is actually in China so cheap. Enjoy reading!
This strikes me from the beginning. Why is Coca-Cola so cheap in China? I do not think now the price of a two-liter, which - as we well know - is determined by the relationship between supply and demand. I mean the price of a half-liter compared to a two-liter.
In the Czech Republic (and elsewhere in Europe, if my memory serves me correctly), in terms of unit, the smaller Coca-Cola costs much more than the large one. I think that the half-liter is around 20 crowns, the two-liter then costs 33-35 CZK (correct me anyway).
It's logical. Smaller bottles involve more costs and the demand of the consumer who buys the small bottle is less elastic, so we can cut it off.
So why doesn't it work in China? In China, a small bottle has 600 ml, large either two liters or 2,5 liters. Prices are almost exactly multiples of the quantity, while a small bottle costs two yuan and five jia in supermarkets, ie. something around seven crowns (no shit).
So I thought about what it could be.
The first thing that comes to mind is that small bottles obviously have no major distribution costs, etc. And so the elasticity remains.
For laymen: If I go through the desert and I'm thirsty and I happen to meet a guy who sells Coca-Cola, its price will be astronomical. Maybe 500 CZK. And I will pay for it, or I would die of thirst. At that moment, my demand will be very inelastic.
I believe that the demand for smaller Coca-Cola bottles is less elastic than the large ones. You are buying a small bottle because you are thirsty now. You buy a big one because you will be thirsty in two days - so when you see a more expensive bigger bottle, you won't buy it. When you see a more expensive one, you won't mind that much.
The question is why it doesn't work in China.
I was not satisfied with the answer that nothing works normally in China, although it is undoubtedly true.
So the only explanation that has occurred to me so far, and which is supported by economic theory, is the explanation by more competition. In China, someone sells drinks and Coca-Cola on every corner. Literally. So even though your demand is inelastic because you are thirsty, you can always walk those few steps to the next corner without any problems.
Of course, it is inconceivable that in the Czech Republic, someone will set up a table on the sidewalk at the crossroads and sell food and drink there. This would violate at least a thousand EU directives that know how to protect customers and how to throw sticks at businesses as much as possible.
And so the Chinese can shop cheaply, the European has to shop expensive. Welcome to capitalism.
The article was originally published on author's blog.