Price Integration in Low-Income Countries: Market Structure and Retail Price-Setting Behaviour in Lesotho

This project examines price-setting behavior in Lesotho to understand pricing and market segmentation in low-income countries characterized by frictions preventing price arbitrage, such as weak infrastructure, poor distribution networks, and 'thin' markets. 

Widespread empirical evidence of price discrimination in markets for manufactured goods suggests that national markets should be viewed as segmented rather than integrated. This research is almost entirely driven by studies of price setting behaviour in developed countries. Yet, market segmentation is likely to be of greater relevance for developing countries where weak infrastructure, poor distribution networks and ‘thin’ markets create frictions that prevent price arbitrage. This study intends to fill the gap in the literature by considering a case of Lesotho, an LIC. The primary focus of this proposal is the collection of new data to build on a unique dataset of monthly product prices at the retail level obtained from the Lesotho Bureau of Statistics (BOS). The study draws on disaggregated product retail price data that is used to calculate the consumer price index (CPI) basket for Lesotho collected by the BOS. The data represents monthly observations at the retail level for prices of 229 different product units over an eight-year period (2002-9), collected from 345 retail outlets (28 in rural and 317 in urban areas). We will collect additional data that, when combined with the retail price data, will allow us to analyse the determinants of price setting behaviour and the role of market structure. The additional data will include: information on the location of the retail outlets and the distances between the outlets in each market; a survey of the retail outlets to capture characteristics such as size, age, type, distribution system, equipment and ownership; information on consumer demand in the vicinity of the retail outlets using census data. This data will be used to analyze:

  • price setting behaviour of the retail outlets, in particular the frequency of price change and the size of price change;
  • price differences across products and locations in Lesotho;
  • factors that drive price setting behaviour and price differences between retailers, in particular market structure and impediments to trade.

The research addresses two of PEDL’s central themes: the modelling of market frictions and the development of micro-founded macro models. It will extend our understanding of pricing behaviour and market segmentation in LICs. All information additional to the price data collected as part of this study will be made publicly available subsequent to completion of the research project (and the PhD thesis that draws on the data).