COCA-COLA? SI, PEPSI! – ‘Taste the Feeling’ of price dispersion in Gibraltar

words | Riaan de Lange

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“Price dispersion occurs when different sellers offer different prices for the same good in a given market. It differs from price discrimination under which a single seller offers different prices to different groups of buyers.”

– Ed Hopkins, November, 2006.

Price discrimination

Why does price dispersion occur in a free market, such as Gibraltar? It is simply due to imperfect information on the part of consumers. As a consequence, consumers do not all buy from the lowest priced seller, which is due, in part, to the fact that some consumers do not even know who the lowest priced seller is.

So, hence it made me think about an economic project that I could undertake in Gibraltar, using a product that you no doubt have had a taste of, at least once before.

Taste the Feeling – Siente El Sabor

On 8 May 1886, Dr John Pemberton, a pharmacist in Georgia, took extracts of kola nuts and coca leaves and mixed them with sugar and carbonated water, inventing what his accountant tasted and called it “Coca-Cola”. Interesting trivia is that Coca-Cola no longer uses either kola or coca in its original recipe. “High fructose corn syrup or sucrose are overwhelmingly the major added ingredients. The primary taste of Coca-Cola comes from vanilla and cinnamon with trace amounts of orange, lime and lemon and spices such as nutmeg.”

Coca-Cola’s price in Gibraltar

From 23 August 2016 to 30 September 2016 I, along with two friends, undertook a project to observe the selling price of Coca-Cola in Gibraltar. We exclusively purchased 330ml cans of Coca-Cola – specifically Coca-Cola Classic, not the other variants – from various vendors in Gibraltar. We had no interest in Pepsi, and merely noted those establishments or sellers (vendors) that offered it for sale. In rare instances, we found some vendors selling Coca-Cola in 330ml bottles – these we also took into account.

Why Coca-Cola, you might ask? Quite simply, there is a single distributor in Gibraltar, and has been since 1949. As a consequence, Coca-Cola is widely offered for sale, at various types of vendors – restaurants, bars, cafés, kiosks, takeaways, filling stations and supermarkets. Also, Coca-Cola is not subject to seasonal demand, nor is it subject to price discrimination between tourists and residents. Yes, Gibraltarians and residents of Gibraltar, purchase Coco-Cola at exactly the same price as tourists do. Surely, this should not be the practice? Well, with this practice not expected to change, anytime soon, it is important for consumers to identify and purchase from the lowest priced seller. That, under the assumption that consumers are rational and that they want to maximise their marginal utility. In laymen’s terms, a consumer wants to make their money go further, and get as much as value as they can from their purchase.

The methodology

The intention of the project was not to provide free publicity to any vendor, nor to point out those that were offering Coca-Cola at the highest prices. I do, however, offer observations on a first-hand account, which though two friends participated, I do not offer their observations – only my own. Though I would like to think that these observations are objective, you might consider them subjective from my own objectivity.

To start any project, you need to identify the vendors, which you could do by simply walking the streets of Gibraltar, which is not a difficult task, and it also offers health benefits, granted the consumption of a Coca-Cola might well erode such benefits. Alternatively, you could obtain a list of the vendors. I did both.

I prepared an initial list from the list of vendors “Restaurants, Bars & Cafés” that I accessed on 23 August 2016 by going to the website www.visitgibraltar.gi/Restaurants, which I subsequently revised, eliminating vendors no longer in business, and adding to the list those which was uncovered through walking the streets. This resulted in a list of 169 vendors.

Although the intention was to only purchase Coca-Cola, this turned out not to be a simple task as you might assume it to have been. Let me explain. When arriving at a vendor, I always asked for Coca-Cola by name, simply asking, “Could I please have a Coca-Cola?”, to which the response generally was, with few exception, “Si”, but then, in quite a few instances, a “Pepsi” would arrive. In short – “Coca-Cola? Si, Pepsi!”. I have to confess, I have yet to be given a Coca-Cola when asking for a Pepsi. Why is that?

Then a further challenge was to consume the Coca-Cola, as we collected the bills – had to have documentary proof of the purchase. There is only so many 330ml cans of Coca-Cola that one can consume on a day, not even mentioning in the course of a morning. Talk about a sugar induced high. As my time tended to be limited to mornings, it added significantly to the challenge. In this instance, I proved the Rule of Diminishing Marginal Utility first hand. I will spare you the proof, but simply tell you that the Rule states that the benefit that is derived from the consumption of additional units of Coca-Cola (in this instance) declines, and in my instance significantly so. It declines to the extent that you simply cannot phantom the consumption of another.

It could be attributable to my accent, though I would argue I do not have one, but what I also discovered when asking for the bill in Gibraltar for one’s purchase, was that it should be pronounced “b-hill”, and even then a bill is not always forthcoming. In some instances, this resulted in a scurry of find any form of paper, even cardboard in one instance, to produce a bill. In some instances, the poor cash registered produced a printed piece of paper with an alien date. It was possibly the first time, for quite some time that it was task to do more than simply holding the change.the_gibraltar_magazine_november_2016-web_page_027_image_0001

For the project, I attempted focus on visiting those vendors that tourists, on a one day visit to Gibraltar would stop at, and thus did not visit all of the multi-star vendors.

The expectations

As my mother taught me, never ask a question to which you do not know the answer. So, what were my expectations?

  • The most expensive Coca-Cola would be procured in Casemates Square.
  • The next most expensive would be on the Upper Rock and then possibly Europa Point.
  • That the least expensive Coca-Colas would be acquired from supermarkets.
  • That a “b-hill” would be forthcoming – without request, and would contain at least the date of the transaction and the name of the vendor.
  • That all acquired Coca-Colas would be served ice cold, or cold at least.
  • That the service would be friendly.
  • That the establishment would be clean – inclusive of the menu.

The data set

What resulted from the project was a very rich dataset, which could be mined even further, but for this article – due to space – I was only able to provide only some insights.

  • The number of vendors that were visited. Any guesses? 104 or 61.54%. Quite a sizable number you would agree.
  • All those at the frontier (including those in Gibraltar International Airport), and those crossing the airport runway into Gibraltar, a large proportion in Ocean Village, nearly all in Waterport, all in Casemates Square, nearly all in Main Street, and then on the Rock and at Europa Point.

The whole sale price for Coca-Cola is £7.88 for 24 cans or £0.33 per 330ml can.

The findings and observations

The most surprising fact was that the most expensive Coca-Cola, of £2.00, was not offered for sale in Casemates Square, and for that matter not even the second most expensive of £1.95. I should just add that none of these were procured as star denominated establishments.

The average profit margin on the wholesale price was 280.95%. Quite a healthy margin. Should you be interested, the highest profit margin was, 509.14%.

Unsurprisingly, the least expensive Coca-Cola was offered by the supermarkets. However, of the four visited (accounting for the chains and not their various premises), two offered it cold and two stocked it on the shelf – unrefrigerated.

Whilst on the topic of refrigeration, generally paying between £1.50 to £1.85 at a restaurant or a bar, does not guarantee you an ice cold Coca-Cola. Interesting how a handful of ice is supposed to remedy the heat. Nor does this price guarantee you a slice of lemon, or even a clean glass. In one instance, I had to return the glass twice, before a clean one arrived, with little being offered as a means of apology.

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As a general comment on hygiene, a large proportion of menus that were offered were highly retentive, for once you took hold of it, it stuck to one’s hand, whilst quite a few were in some form of disrepair. Not sure what the health requirements are with respect to offering clean menus, how often it should be cleaned or, for that matter, even be replaced? And in open air restaurants, the litter on the ground seem to form part of the décor, particularly when visiting the establishment after midday.

Another interesting observation offered by the data was what can only be called the “shameful exchange”, which is more evident in the instance of restaurants and bars when they bring your bill. The practice also finds favour with other vendors, but then, unlike restaurants and bars, they do not offer a Pounds/Euro split bill. So to establish the exchange you need to procure Coca-Cola in Pounds and then in Euros. It is quite evident that the margin is not only made on the retail price differential but also on the exchange differential. Following Pound’s depreciation (also read slide) against the Euro, this has of course lead to increased margin. The average exchange rate differential is 24.60%, the highest being 133.22%.

Generally, takeaways, kiosks and some supermarkets do not offer a bill, and then even when asking at takeaways and kiosks, it is also not always forthcoming. This brings to question just how they record their turnover, and prepare their accounts, particularly their tax returns?

Just on the aside, in my experience, the waiters/waitresses at restaurants and bars seem not to have been non-Gibraltarian, and with English seemingly not their first language.

Recommendations

As a positive spin-off of this project, there are a few recommendations that one can offer. Just in case you are wondering, I will not deal with the profit margins on the vendors’ sales. This is something that you, the consumer, should do. If anything, this project gave you more information, so you can no longer claim to have imperfect information. So, next time you indulge in a Coca-Cola, you should be aware of the cost that you are paying, the premium for being seated in the sun or inside a nicely decorated establishment. Nothing in life is free, everything comes at a price – remember that.

Then, the shameful exchange should be addressed. This is a market failure, which implies rectification through government intervention. This can of course take various forms, but at the very least, tourists could be warned of this practice as they enter Gibraltar. It is quite interesting the reaction of people if you mention this to them. Some, astoundingly say, “Well, Gibraltar is a tourist destination, and this also happens in other tourist destinations”. Really? So, this is acceptable for others do it? No, no, this cannot be an argument or even a justification.

With not all vendors recording the sale of Coca-Cola, and in an instance where a bill was requested, it was scribbled on paper, or even the bills offered had incorrect dates printed on them. Should consideration not be given to introduce Value-added Tax (VAT) at a zero rate, so as to at least ensure that turnover is recorded?

A final recommendation is for attention to be paid at the cleanliness of menus, the replacement of menus in forms of disrepair and for the ground/paying around the restaurants and bars to be cleaned.

Disclaimer: The intention of this article is not to offend, but to challenge you to look at things differently. I am reminded of the immortal words of Thomas Paine “He who dares not offend cannot be honest.”