Mamello Amelia Nchake (Dr.)
Faculty of Economics I National University of Lesotho


Widespread empirical evidence of price discrimination in markets for goods and services suggests that national markets should be viewed as segmented rather than integrated. Yet, this research is almost entirely driven by studies of price setting behaviour in developed countries. This thesis extends the empirical literature by providing new evidence on price setting behaviour and product market integration in developing countries using a unique data set of monthly product prices at the retail outlet level or regional level for Lesotho, South Africa and Botswana over the period 2002 to 2009.

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The thesis is comprised of three main chapters. The first chapter provides evidence that none of the time-dependent or state dependent theories of price setting behaviour are entirely consistent with the empirical features found in the data. Therefore, it is difficult to find one theory that can explain pricing behaviour economy-wide. Improvements can be made on the current theories of price setting to incorporate different characteristics of price setting that are specific to developed and developing countries. The second chapter examines the relationship between inflation and the frequency of price change and suggests that goods are characterised by state-dependent pricing andservices are characterised by time-dependent pricing, consistent with the presence of menucosts in goods and not in services. The dominance of South African retail chains in the Lesotho retail sector affects price setting behaviour in Lesotho. Product markets are more integrated, between Lesotho and South Africa, in the more tradable sectors. The differentia limpact of local, national and regional inflation on price setting behaviour suggests that product markets remain segmented, despite Lesotho’s membership of the Southern African Customs Union (SACU) and the Common Monetary Area (CMA).

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