The authors study the relationship between price-setting behavior and the degree of competition in a setting where markets and information flows are relatively imperfect. Using a unique dataset that combines survey data on retail outlets in Lesotho, and detailed historical information on their product prices, they find a non-monotonic relationship between the frequency of price changes and perceived competition, measured by the number of reported competitors. This non-monotonic relationship is consistent with a model of increasing costs of coordinating price changes under tacit collusion with few competitors, and a breakdown of collusion at higher levels of competition. By exploring the nature of the relationship between competition and price rigidity, the study has implications for macroeconomic and competition policy, and underscores the scope for interaction between the two.
This research was funded under the Private Enterprise Development in Low-Income Countries (PEDL) Programme
Nchake, M., Edwards, L., Sundaram, A. Price-setting Behavior and Competition in Developing Countries: An Analysis of Retail Outlets in Lesotho. (2015) 27 pp
Price-setting Behavior and Competition in Developing Countries: An Analysis of Retail Outlets in Lesotho
Published 1 December 2015