Price setting in the South African services sector

Abstract

The way that companies price has a significant effect on ability of policy makers to actually effect real change at the consumer level. In particular the concept of price stickiness determines the lag and magnitude of effect that macroeconomic policies will have on prices and inflation, if any. A number of studies on price setting have been done internationally with the bulk of these focussing on the available micro data. There has been a recent trend towards survey based studies to understand the underlying reasons for price stickiness in firms and this paper follows that trend focusing on South African service firms.The way that companies price has a significant effect on ability of policy makers to actually effect real change at the consumer level. In particular the concept of price stickiness determines the lag and magnitude of effect that macroeconomic policies will have on prices and inflation, if any. A number of studies on price setting have been done internationally with the bulk of these focussing on the available micro data. There has been a recent trend towards survey based studies to understand the underlying reasons for price stickiness in firms and this paper follows that trend focusing on South African service firms.The results show that firms follow a time dependent process for price reviews with the majority reviewing price once a year. The annual nature of these reviews is related primarily to the fact that wages contribute a much higher percentage than seen in other sectors and, by its nature, increases annually. This accounts for the higher stickiness seen in the services sectorBecause firms are largely independent in their pricing behaviour, co-ordination failure remains the key cause of price stickiness followed by explicit and implicit contracts which stem from the focus on maintaining good customer relations.