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China: Prices in second and third tier cities higher than in first tier cities?

As the new Spring Festival arrives, many people leave Beijing, Shanghai, Guangzhou, and Shenzhen to spend Chinese New Year at home. When they talk with friends and colleagues there is always one topic that comes up: everyone complains that the prices in first tier cities are high, but now that they are back in their hometown it seems that third and fourth tier cities are even more expensive than first tier cities. 

Although average prices in second and third tier cities seem to be higher than in first tier cities, it is not fair to treat them all the same. For example, if a city is in the production area of a certain product, then that product will obviously be cheaper in that city compared with other cities outside the production area.

Large crowds leave for Spring Festival

Large cities like Beijing, Shanghai, Guangzhou, and Shenzhen have enormous populations. Apart from that, the major distribution centers are located in these cities. The product flow streams into first tier cities because of their function as distribution centers, before it flows out again to other cities. Since rarity increases value, the abundance of products that flow through first tier cities causes the prices in these cities to drop.

Since the popularization of the internet and the promotion of stores directly attached to factories, many products in Beijing, Shanghai, Guangzhou, and Shenzhen have already shown trends of the large-scale economies effect. These effects will only lower the product price further. However, in order for these products to reach third and fourth tier cities they have to go through the hands of many dealers, and at each level the price is increased.

Vegetable area in the supermarket

First tier cities like Beijing, Shanghai, Guangzhou, and Shenzhen have well-developed maritime transport facilities. Maritime transport is the cheapest form of transport. Add to this the sudden development of "modernized distribution" industry with major distribution companies competing for market shares, and the price gradually drops. Only the distribution companies that offer competitive prices can survive.

The third and fourth tier cities are not the same. Distribution depends on traffic, and infrastructure is not as well-developed as in first tier cities. Furthermore, toll roads and bridges add to the price every time a product is transported. This means that distribution companies can only afford to transport products to third and fourth tier cities if they increase the price.

Source: news.sohu.com

Publication date: 2/23/2018


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