Consumer price rigidities in Lesotho: the role of outlet characteristics and competition

Abstract

This paper extends the microeconomic empirical evidence on price-setting in emerging economies using micro price data and outlet survey data for Lesotho, a small low-income landlocked economy in Southern Africa. The paper looks at how price-setting behaviour differs by outlet size, location and type. It also analyses the various sources of price changes and price rigidities, including the effect of competition on the frequency of price changes. Our results reveal many similarities and some important differences in price-setting behaviour between outlets in Lesotho and those in advanced economies. The flexibility of prices in Lesotho is comparable to that of the US, but higher than in South Africa. Prices change more often in large outlets and less frequently in outlets where labour costs are an important component of costs. Implicit contracts with consumers and co-ordination failure in the setting of prices across competitors rank highly as sources of price rigidity, while menu costs and explicit contracts are found to be relatively unimportant. Cost shocks have a stronger influence on price increases than price decreases, while shocks to market conditions (demand and competitor's price) are more relevant for price decreases than for price increases. These results corroborate findings in advanced economies. However, contrary to theoretical expectations and other empirical findings, no consistent relationship between the frequency of price changes and the perceived competition in the market is found.

Citation

Nckake, M.; Edwards, L.; Sundaram, A. Consumer price rigidities in Lesotho: the role of outlet characteristics and competition. (2014) 31 pp.

Consumer price rigidities in Lesotho: the role of outlet characteristics and competition

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