Price setting behaviour in the South African retail sector

Abstract

The pricing practices that firms that follow are important from a microeconomic as well as a macroeconomic perspective, indicating the nature and level of competition. These practices also prove to affect the effectiveness of monetary policy. This study engineered a survey approach to better understand the pricing behaviour of firms in the South African retail sector.The survey approach to understanding pricing setting has grown in popularity in recent times, allowing for deeper insights into the mindsets of actual pricing professionals than information offered by micro data studies. Most previous studies have focused on developed countries, while this study deals with a sector of high industry concentration in a developing country with a relatively unstable foreign exchange rate.The results of the study demonstrate that South African retail firms compete primarily with their pricing and quality, and that there is evidence of barometric price leadership. The dominant framework used by firms to set their prices is mark-up pricing.Both price reviews and price changes in South African retail firms were found to be time dependent, and the causes of price changes were asymmetrical depending on the direction of the change. The main driver of price increases was an increase in input costs, while the main driver of price decreases was a reduction in domestic competitor prices.Prices within the South African retail sector were found to be sticky, with the strongest specific cause of firms delaying price adjustments being the maintenance of threshold prices. When considering the reasons for stickiness more broadly as themes, customer relationships are the strongest driver of stickiness, followed by the avoidance of coordination failure.