Archive | January 5, 2014

What Determines the Price of Goods in African Markets?

DSC_0443I’m gearing up to write a paper on pricing of malaria drugs in private drug shops in Sub-Saharan Africa so the question is on my mind.

We know that things in shops aren’t free; there is a certain amount of cash money to be paid. However, even in rich, well studied America, the mechanics which determine how retailers set their retail prices remains somewhat mysterious.

Common wisdom (assuming that neo-classical economics can be consider as such) would suggest that prices are the result of a balance between supply and demand. Customers and retailers weigh out each other’s needs and assets and an equilibrium arises. The trouble with this thinking is that it assumes that customers and retailers operate with perfect information about markets on all the products and services available. It assumes that customers (and retailers) weigh out prices when deciding where to purchase an item.

An example, when people choose a bar they rarely consider the price of the drink. They have a fixed amount of money they are willing to part with, but the drinking, the establishment and the people they meet all take priority over the individual prices of the drinks. As Robert Nielsen noted in a recent blog post, bars don’t charge more when demand goes up at night and one the weekends, and don’t normally charge less when the place is empty (outside of happy hours).

My epiphany came to me as I was wedged at the bar where I had been waiting for half an hour trying to order a drink during Black Monday. Why didn’t the student bar just raise its prices to deal with the excess demand which they knew would occur (as it did every year)? Why did they opt for an option that any first year economics student is taught is highly inefficient?

The explanation could be that there is a price that customers expect to pay for a good or a service and retailers, worried only about percentage profit margins on individual goods rather than the business as a whole, are inflexible when assigning prices, ignoring methods which might efficiently react to market pressures.

But, really, nobody knows for sure. Whatever the method behind the madness is, the story isn’t simple and not many people agree on much.

In African markets, the factors which contribute to pricing are even more vague, mostly because people haven’t really looked at it. Anyone who has been to Africa knows how the informal sector works. Lots of people sell the same things for the same price right next to each other. For example, it’s not uncommon to see 50 people selling the same rice next to each other for the same prices. There’s so many retailers and so few customers, that is is improbable that anyone is making any money at all.

Worse yet, African retailers are hesitant to introduce measures which would increase efficiency, such combining shops. A sole proprietor loses business when away from the shop. Two proprietors can take shifts, allowing one to take care of daily business while still making money. They can combine capital to obtain a wide variety of products. Better yet, partnered shops can take advantage of bulk discounts, possibly passing savings on to customers and remain competitive.

The result is that this hyper-competition and inefficiency is potentially raising prices for customers. Increased market efficiency would allow for lower pricing, allowing customers to buy a wider variety of goods and still cover expenditures like school fees and health care. It’s possible that overall market inefficiency is complicating public health efforts to control and prevent disease and death through a lack of disposable income and even through exorbitant prices for drugs.

But, again, this assumes we know anything about pricing, which we don’t. Un-cracking this nut could help save some lives.

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