Price setting behaviour in Lesotho: The role of outlet characteristics and competition

Transcription

1 Price setting behaviour in Lesotho: The role of outlet characteristics and competition by Mamello Nchake and Lawrence Edwards PEDL research workshop, London, United Kingdom

2 Background Outline Objective of the project Retail price data Results (price data) Survey data Preliminary results (survey data) Determinant of price setting using merged datasets 12/17/2013 2

3 Background Analysis of firm pricing behaviour using micro price data has grown rapidly in recent years as micro pricing data has become more available (Klenow and Malin, 2011). These studies have drawn on a variety of data sets micro price data used to compile Consumer Price Index (CPI) and Producer Price Index (PPI) measures, scanner data and firm survey data. Most studies, however, have focused on advanced economies. With a few exceptions, the challenge for studies on pricing behaviour in emerging economies has been the availability of price data at the micro level. 12/17/2013 3

4 Objective of the project Development of integrated retail price and outlet characteristics database for Lesotho. Build a dataset of monthly product at the outlet level using data from the Lesotho Bureau of Statistics (BOS) Conduct survey of these retail outlets Link the product prices database at these outlet survey database Use data to analyse characteristics and determinants of price-setting behavour 12/17/2013 4

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6 The product price dataset 1. Outlet product price data Monthly product price data (March 2002-Dec 2009) across the 10 districts of Lesotho 345 retailers 317 in urban centres 28 in rural areas 229 products 91 food (41 perishables, 50 non-perishables) 138 non-food (59 durables, 56 non-durables, 23 services) 12/17/2013 6

7 Product price dataset Objectives To identify stylized facts that characterize price setting behaviour (e.g. The frequency of price change, price increases and price decreases) To identify the dynamic features of price changes, including the synchronization of price changes and decomposition of inflation To use data to test consistency of theoretical models of price setting behaviour To compare the stylised facts on price setting behaviour in Lesotho to other countries and South Africa in particular. 12/17/2013 7

8 0 Fraction Selected stylized facts - using price data 1. Heterogeneity in the frequency of price change Heterogeneity across products : Frequency of price change Mean frequency of 37 percent (implied duration of 2.7 months) The frequency of price change exceeds 40 percent (implied duration of 2.5 months or less) for a quarter of all product items. For 24 percent of all product items, prices change at most once every 4 months (frequency of 24 percent or lower). 12/17/2013 8

9 Selected stylized facts - using price data Heterogeneity within products across outlets CPI weighted Simple average Median sd frequency within products Implied duration Goods Food Non-alcoholic beverages Alcoholic beverages Tobacco and narcotics Clothing and footwear Fuel Household furniture and equipment Household operations Transport equipment Personal care Services Medical care and health expenses Recreation and culture Education Transport services Other goods and services Total /17/2013 9

10 Selected stylized facts - using price data Large average size of price change, but many small price changes 12/17/

11 Selected stylized facts - using price data 2. Dynamic features of price changes: sources of change in inflation Gives important theoretical insights; In the time-dependent staggered price models of Taylor (1980) and Calvo (1983), the intensive margin (IM) accounts for all the variation in inflation, In some state-dependent pricing models, the frequency plays a substantial role (Malin and Klenow, 2011). 12/17/

12 Selected stylized facts - using price data Size of price changes (IM) is more closely associated (acc for 94.9 % of inflation) with inflation than the frequency of price changes (EM). 12/17/

13 Selected stylized facts - using price data but the frequency of price increases (decreases) is positively (negatively) correlated with inflation Reductions in prices constitute an important source of variation in inflation (34 percent of inflation variation) 12/17/

14 Selected stylized facts - using price data 3. Comparison with South Africa Product markets in Lesotho are expected to be highly integrated with those in South African Frequency of price change much higher in Lesotho (47 percent vs. 17 percent) Dependent variable: Lesotho Independent variable: South Africa Coef Std. Err Significance Adj R2 Frequency price change *** 0.42 Frequency price increase *** 0.23 Frequency price decrease Inflation *** 0.06 Significant positive association between frequency of price changes in the two countries Driven by the frequency of price increases, not decreases. No association between size of price change 12/17/

15 Concluding remarks - using price data We also look at many other stylized facts Duration and size, distribution of size, hazard rates What is missing in the price data analysis is the role of outlet characteristics. We use survey of retail outlets to unpack this. 12/17/

16 Administering survey 12/17/

17 The dataset Outlet survey data across the 10 districts of Lesotho District Number of outlets Total Sample Number of respondents Response rate Maseru Butha-Buthe Leribe Berea Mafeteng Mohales' Hoek Quthing Qachas' Neck Mokhotlong Thaba-Tseka Total /17/

18 Objective Survey dataset Identify role of location, competition and outlet level characteristics in determining price setting behaviour in Lesotho Two channels to analyse price setting behaviour Analyse the main price setting strategies of retail and services outlets Analyse factors that prevent outlets from increasing prices of main product/service 12/17/

19 Preliminary results survey data 1. What are main price setting strategies across outlets? Share of total responses (percent) Variable Retail Services Total Mark-up over costs Government Business council The parent company/ Head quarters Main competitor's price Decision making process of price setting mostly takes place within the outlet itself. Dominance of mark-up consistent with imperfectly competitive markets 12/17/

20 Preliminary results survey data 2. Which factors delay increasing the price of the main product/service? Main factors of price rigidity Share of all responses (percentage) Important Very Total important Coordination failure Explicit contracts Attractive thresholds Menu costs Implicit contracts Bureaucratic rigidities Other /17/

21 Merging the two datasets Link the survey data with the retail price database Analyse the main determinants of frequency of price change outlet characteristics and market structure Use price data from January 2010-December 2012 which closely map the outlets in that sample Final sample has 370 mapped outlets and 14 main products 12/17/

22 Preliminary results Descriptive analysis: Unconditional relationships 1. The frequency of price changes is higher for large firms (31 %) than for small firms (29%) 2. Retail outlets change prices more frequently (30%) than services (24%) 3. The frequency is higher for supermarkets than other outlets and lower for chain stores than other outlets 4. Outlets with more competitors change prices more frequently (30%) than outlets with low competition (29%) 12/17/

23 Preliminary results conditional relationships VARIABLES (1) Outlet level Number of competitors ** (0.002) Outlet factors Size of outlet 0.039*** (0.009) Services *** (0.020) Supermarket ** (0.017) Chain (0.013) Incl. other controls(location, assets) Product fixed effects Area fixed effects Observations 280 Adj. R-squared 0.27 Columns 1 are basic regression and columns 2 are basic regressions with area fixed effects. Robust standard errors in parentheses are clustered at outlet level. *** p<0.01, ** p<0.05, * p<0.1 No Yes The competition variable may be biased due to omitted variable, e.g. demand in that market 12/17/

24 Results Frequency price change Instrumental variable approach VARIABLES (1) Outlet level Number of competitors 0.020** (0.009) Outlet factors Size of outlet 0.022** (0.011) Services *** (0.027) Supermarket ** (0.023) Chain (0.016) Plus controls (location and assets) Observations 280 Adj. R-squared /17/2013

25 Concluding remarks Most outlets set the prices of their main product based on mark-up over costs Size of outlet and level of competition are important determinants of the frequency of price change large outlets change prices more frequently than smaller outlets Outlets faced with more competition change prices more frequently Implicit contracts or long-term relationships with customers and coordination failure are important sources of price stickiness 12/17/

26 Way forward Price database: extend the analysis to look at: product market integration, role of borders in driving price differences links between inflation, monetary policy and price setting behaviour Survey database: Unpack outlet characteristics in more systematic way. This involves investigating the endogeneity of competitive measures in price setting decisions NB: We also want to raise finance to run survey again in 2015 to develop panel to analyse price dynamics at outlet level. 12/17/

27 Thank you!!!