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Price setting behaviour in Lesotho: Stylised facts from consumer retail prices

This paper documents some of the main features of price setting behaviour by retail outlets in Lesotho over the period March 2002 to December 2009. The sample of data covers 229 product items for 345 retail outlets. The paper has three main objectives. Firstly, it presents key indicators of price setting behaviour such as the frequency of price changes, the average size of price changes and the probability of price changes at the retail outlet level. Secondly, it identifies some of the dynamic features of price changes, including the synchronization of price changes and the relationship between the frequency and size of price changes and the duration of the existing price. Finally, the paper compares the stylised facts on price setting behaviour in Lesotho to other countries and South Africa in particular. The findings of the paper corroborate those in the international empirical literature. Substantial heterogeneity in price setting behaviour is found across products, outlets 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. 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. Further research is required to unpack the sources of heterogeneity in the setting of prices and the stark differences in price setting behaviour in Lesotho and South Africa.

Working paper 417
1 February 2014
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South African Journal of Economics
2 July 2014
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