By Lei Yi (雷頤)
Issue 595, Nov 19, 2012
Observer, page 48
Translated by Dou Yiping
Original article: [Chinese]

The author is a historian of late-Qing and modern China and research fellow at the Chinese Academy of Social Sciences.

One of Chinese writer Lu Xun (魯迅)’s most celebrated works was Mr. Fujino, where he recalled being given special treatment as the only foreign student at Japan’s Sendai Medical Academy.

“It’s presumably because a thing is valued in proportion to its rarity,” Lu said. We tend to forget this simple truth.

Recently, there’s been controversy stemming from international companies doing business with “double standards.” The American coffee chain Starbucks is one of these cases. Here in China, Starbucks is considered a top-notch brand among the “petite bourgeoisie” A cup of coffee that’s $1.93 in America costs about $3.37 in China. Despite consuming the exact same ingredients, Chinese spend about 75 percent more.

Likewise, a carton of Häagen-Dazs ice cream costs only $2 or $3 in the US. However, in China it becomes an “aristocratic” ice cream, which is quite puzzling to many Americans. Many foreign brands that are common in their own countries - like the Japanese food chains Ajisen and Yoshinoya – have rebranded themselves as high-end in China.

Some say this is discriminatory pricing and an ethical lapse in doing business; especially since labor costs are so much cheaper in China. They believe that, even when taking tariffs into account, companies should make prices comparable across borders rather than gouging certain countries.

But in fact, it’s perfectly natural that Starbucks is an expensive status symbol in China. Just like in 1987 when KFC opened its first restaurant in Beijing, throngs of customers lined up despite the high prices. Back then, since it was the only KFC in China, treating friends or relatives from other cities there gave a Beijinger face. Now KFC is everywhere. It’s long lost its high status and is now even derided as junk food. It’s a perfect example of the saying “a thing is valued in proportion to its rarity.”

When we talk about “doing business,” we’re referring to exploiting regional price differences and shipping commodities from one place to another to make money. It’s natural that a given commodity is sold at different prices in different places. 

But back in the days of China’s planned economy, this was called speculation and it was illegal. A speculative dealer could even be sentenced to death.  At the beginning of China’s Reform & Opening-Up, there was a long discussion about whether farmers should be allowed to profit from regional price differences.

Of course, such practices have been deemed crucial to development and are now legal and encouraged.  However, “double-standard” business practices are still criticized as being “discriminatory pricing” or “ethical lapses.” These are just nationalistic labels for speculation.

Here are the questions we have to ask: How do we define a selling price as “proper” or “unreasonable?” And who sets the price - the markets, consumers or the government?

Commodity prices are determined by markets, not the government. This is a basic rule for international commerce and no company sets prices arbitrarily. Businesses, especially the big ones, set their prices according to thorough analysis and repeated testing. Besides, being able to charge what it wants is one of a company’s most fundamental rights.

In a nutshell, the selling price depends on supply and demand. In Lu Xun’s time, celery cabbage was a staple vegetable for poor people in northern China. However, in the south it was rare and sold in chic packaging to show its prestige. When Starbucks takes the early advantage by turning a street brand into a prestigious one, it’s doing business the exactly same way that KFC and the vegetable traders did – using common business sense.