February 15, 2016 Kh-Index | Georgia temporarily converges to the “law of one price”

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15 February 2016

With the New Year festivities finally behind us, ISET’s Khachapuri Index started on its seasonal downhill trajectory. In January, the Index slid 4.3% m/m, reaching 3.61 GEL per one standard portion of the Imeretian khachapuri. At the same time, it is some 6% higher y/y (compared to January 2015).

Interestingly, the Index currently takes nearly identical values all over Georgia, adhering to the “Law of One Price”. According to this economics concept, similar goods should be sold at roughly the same price in all locations in a country (assuming no artificial trade barriers and low transportation costs). The idea behind this law is very simple: if prices were to significantly diverge, shrewd traders would use this “arbitrage” opportunity to profit. They would buy low and sell high until prices converge.

As one can see below, the Law of One Price is not really holding in Georgia’s realities. For example, the Khachapuri Index rarely takes the same value in Kutaisi (the capital of Imereti) and Tbilisi. The gap is typically higher in spring and early summer when the local Kutaisi market appears to be saturated. Some of the Imeretian cheese, of course, finds its way to Tbilisi, but, as production peaks, local demand for dairy products effectively goes to zero, causing prices in the Kutaisi market to go through the floor. Why? Because come spring, almost all families in Kutaisi (and/or their close relatives in nearby villages) start producing its own (delicious) cheese and matsoni.

Tags: #index, #khachapuri index, #inflation, #prices,

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