Price Setting Behaviour in Lesotho: Stylised Facts from Consumer Retail Prices

Abstract: 
This paper by Edwards and Nchake (2015), published in the South African Journal of Economics, documents some of the main features of price-setting behaviour by retail outlets in Lesotho over the period March 2002 to December 2009. These features include the frequency, size, duration and synchronisation of price changes. In addition, the paper compares price-setting behaviour in Lesotho and South Africa using a comparable set of products. The findings reveal considerable heterogeneity in price-setting behaviour across products, outlets, locations and time. Variations in inflation are strongly correlated with the average size of price changes, but rising inflation raises the frequency of price increases and reduces the frequency of price decreases. Price decreases constitute an important determinant of inflation movements. Surprisingly, the frequency and size of price changes in Lesotho differ substantially from those in South Africa, despite the presence of common retail chains and their joint membership in a customs union and common monetary area. These findings open up opportunities for further research into the sources of heterogeneity across products and Lesotho and South Africa in the setting of prices.