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Market Integration and Transportation: Brewery Industry in Lao PDR

Andersson, Magnus LU (2011) Brewery Industry in Emerging Markets p.1-30
Abstract
This paper explores market integration in Lao PDR, focusing on the beer market. At the time of analysis, the Lao beer market exhibited some highly unusual features that facilitate our exploration. Beer Lao, the domestic beer brand, was completely dominant in the market – importation of beer was not allowed, and informal (illegal) imports were of very limited importance. Beer Lao was produced in one single location in the country, outside the capital Vientiane, but available throughout the country, even in the most remote villages. At the time, Beer Lao was only produced in one variety: a light lager beer sold in 640 ml bottles. This makes it a good – if not unique – example of a homogeneous consumer good.

Using price data from a... (More)
This paper explores market integration in Lao PDR, focusing on the beer market. At the time of analysis, the Lao beer market exhibited some highly unusual features that facilitate our exploration. Beer Lao, the domestic beer brand, was completely dominant in the market – importation of beer was not allowed, and informal (illegal) imports were of very limited importance. Beer Lao was produced in one single location in the country, outside the capital Vientiane, but available throughout the country, even in the most remote villages. At the time, Beer Lao was only produced in one variety: a light lager beer sold in 640 ml bottles. This makes it a good – if not unique – example of a homogeneous consumer good.

Using price data from a large number of locations throughout the country, factory gate beer prices, and information on transportation costs and local market conditions, we explore the variation of beer prices across Lao PDR, to proxy the degree of market integration. The assumption is that the law of one price applies in an integrated market, and that the degree of price variation that is not explained by transportation and transaction costs proxies the degree of market fragmentation. Using this definition, we conclude that the market in Lao PDR is highly fragmented. Local prices depend not only on transportation costs, but also on local market characteristics, like local market size, income level, and the presence of daily or weekly markets. In particular, we find that better road infrastructure seems to be connected to price reductions that are larger than the reduction in transportation cost that is made possible by road improvements. This points to a very important feature of market integration. Weak infrastructure works as a barrier to entry, reducing the number of sellers in the local market and creating local monopolies and oligopolies. Improvements in road quality reduce entry barriers, resulting in increased competition at the local level, with substantial benefits for both local consumers of outside products and local producers of goods that are sold to outsiders. This competition effect is rarely included in cost-benefit analyses of road construction projects, which suggests that the social benefits may be underestimated, and that Lao PDR may be underinvesting in road infrastructure. (Less)
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author
organization
publishing date
type
Contribution to conference
publication status
unpublished
subject
pages
30 pages
conference name
Brewery Industry in Emerging Markets
language
English
LU publication?
yes
id
6e8ad3c1-bf54-4db4-9ec3-f7260126eb3d (old id 3127671)
date added to LUP
2012-10-09 14:57:42
date last changed
2016-04-16 10:11:39
@misc{6e8ad3c1-bf54-4db4-9ec3-f7260126eb3d,
  abstract     = {This paper explores market integration in Lao PDR, focusing on the beer market. At the time of analysis, the Lao beer market exhibited some highly unusual features that facilitate our exploration. Beer Lao, the domestic beer brand, was completely dominant in the market – importation of beer was not allowed, and informal (illegal) imports were of very limited importance. Beer Lao was produced in one single location in the country, outside the capital Vientiane, but available throughout the country, even in the most remote villages. At the time, Beer Lao was only produced in one variety: a light lager beer sold in 640 ml bottles. This makes it a good – if not unique – example of a homogeneous consumer good. <br/><br>
Using price data from a large number of locations throughout the country, factory gate beer prices, and information on transportation costs and local market conditions, we explore the variation of beer prices across Lao PDR, to proxy the degree of market integration. The assumption is that the law of one price applies in an integrated market, and that the degree of price variation that is not explained by transportation and transaction costs proxies the degree of market fragmentation. Using this definition, we conclude that the market in Lao PDR is highly fragmented. Local prices depend not only on transportation costs, but also on local market characteristics, like local market size, income level, and the presence of daily or weekly markets. In particular, we find that better road infrastructure seems to be connected to price reductions that are larger than the reduction in transportation cost that is made possible by road improvements. This points to a very important feature of market integration. Weak infrastructure works as a barrier to entry, reducing the number of sellers in the local market and creating local monopolies and oligopolies. Improvements in road quality reduce entry barriers, resulting in increased competition at the local level, with substantial benefits for both local consumers of outside products and local producers of goods that are sold to outsiders. This competition effect is rarely included in cost-benefit analyses of road construction projects, which suggests that the social benefits may be underestimated, and that Lao PDR may be underinvesting in road infrastructure.},
  author       = {Andersson, Magnus},
  language     = {eng},
  pages        = {1--30},
  title        = {Market Integration and Transportation: Brewery Industry in Lao PDR},
  year         = {2011},
}