Markets in the Arctic: Where Size and Weight Are Important Determinants of Pricing

[chiang]

Among my most memorable trips in recent years include visiting remote towns in the Arctic, where there are no roads connecting to other towns, and limited access to waterways due to the sea being frozen for much of the year. In two towns that I visited, Barrow, Alaska, and Iqaluit, Nunavut, the only viable means of transport for passengers and goods is by air.

For most of us urban-dwellers and rural residents who live in towns connected to one another, we are accustomed to seeing prices of everyday consumption goods based on the cost of raw materials and other inputs that contribute to their wholesale price. The difference in retail prices between a department store in Akron and a convenience store in Los Angeles is based on factors such as competition, economies of scale, and taxes. But one input we often take for granted is the transportation cost, given the efficiencies of the shipping industry that allow goods to be transported quickly and efficiently throughout the country.

However, in the Arctic north, prices are largely dependent on transportation costs, because everything other than the few locally-made items is delivered by air. Therefore, retail markups are largely calculated based on the wholesale price plus a large premium for the air freight. Consequently, prices for heavy household items such as laundry detergent and cat litter that typically sell for less than $10 at a Walmart or Target can be five to ten times that cost in Iqaluit. Moreover, heavy items that are also perishable such as orange juice and milk can have an even higher markup. Meanwhile, goods that are relatively light and have a longer shelf life, such as microwave popcorn, have prices that are much closer to what we are used to.

Visiting towns that are largely cut off from the rest of the world provides a unique perspective to market pricing, which subsequently influences the goods that residents in these faraway places consume.