Price-setting Behavior and Competition in Developing Countries: An Analysis of Retail Outlets in Lesotho

Wednesday, 30 November, 2016
In this working papers Nchake, Edwards and Sundaram (2015) 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.