Price Elasticities and Pricing Power in Emerging Markets: The Case of Petrochemicals Derived Plastics in South Africa

Working Paper 078
Author(s): 
Johannes Fedderke and Witness Simbanegavi
Publication date: 
May, 2008
Classification-JEL: 

This paper examines whether there necessarily exists a conflict between allocative and productive efficiency in small open economy markets. That productive efficiency favours market concentration is not in dispute, and the sole question we face is whether allocative efficiency suffers under high market concentration. We proceed theoretically and econometrically. We find that the conflict between productive and allocative efficiency is not necessarily as stringent as the international competition policy literature suggests should be the case. In particular, we note that the strategic interaction between the large domestic producer and its competitors makes feasible a range of alternative price elasticities of demand, and empirically that all price elasticities of demand are less than or equal to unity. Nevertheless the impact of market structure is such as to render feasible a wide range of possible levels of pricing power.

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