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

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.