Price setting behaviour of firms stimulates production and consumption and thereby facilitates optimal allocation of resources. Further, the ability of a market to contribute positively and efficiently to economic development depends on how price changes are transmitted spatially and temporally between markets for homogenous products. In spite of the importance of firms' price setting behaviour, there are a limited number of studies examining it in a developing country context where disaggregated price data are unavailable as economic shocks are frequent and inflation rates are high and unstable. In this project, Taiwo Owoeye and Olufemi Ajiboye will analyse the main stylised facts that characterise price setting behaviour in the Economic Community of West African States and distinguish between the two theories of price setting behaviour (time- and state-dependent) in explaining empirical characteristics of data from ECOWAS.
The data consists of highly-disaggregated, micro-level, monthly retail price data that underlies the computation of the National Index of Consumer Prices in selected ECOWAS countries. Twenty-two identical products were chosen across Benin, Nigeria and Togo and their prices were collected across the five years between 2011 and 2015. In order to gain an insight into the quantitative nature of the price setting process, the study shall employ a frequency approach that allows for the use of all the data and avoids the potential bias from censored data. However, it relies on specific assumptions about the distribution of price changes over time. In this approach, the frequency of the price changes is computed as a proportion of the times a price for a product in a retail outlet is changed over a number of observation periods and then a measure of the implied duration of a price spell is derived. Other measures of price setting behaviour like direction of price changes and average size of price changes, will also be derived using the frequency approach. These measures will then be used to evaluate whether data for the ECOWAS region fit into either the time-dependent pricing model or state-dependent pricing model.
Price setting behaviour differs across countries. For example, the time-dependent model seems prevalent in developed countries mainly because of macroeconomic stability, while the state-dependent model dominates price setting behaviour in developing countries because of macroeconomic instability and the vulnerability of these countries to exogenous shocks and the effects of these shocks on price stickiness. This study will provide evidence on price setting behaviour for ECOWAS which has two distinct features. One, the countries within these regions have two monetary unions with some implications for macroeconomic stability. Two, the region has attempted over several decades to create a single market for the free movement of goods and services. Further, the findings from this study will provide direction for policy makers as they seek to understand how to design policies that will help firms respond to economic conditions in fixing the prices of goods and services.
