Home' Trinidad and Tobago Guardian : July 10th 2014 Contents BG6 | NEWS
BUSINESS GUARDIAN www.guardian.co.tt JULY 2014 • WEEK TWO
In the T&T market, quality is more
important than price, most companies
alter their prices without publicly
explaining why and prices are rigid,
according to a Central Bank of T&T
(CBTT) study released July 2 (2014).
The paper, "Price Setting in T&T: Evidence
from Survey Data" is authored by Reshma
Mahabir, Keyra Primus, Delvin Cox, Vishana
Jagessar and Crystal Neptune. The authors are
economists who at the time were attached to
the CBTT research department.
The views expressed are those of the authors
and not necessarily those of the CBTT, a dis-
claimer at the top of the study said.
Explaining its role in the paper, the CBTT
said: "Understanding the factors that determine
on what basis firms change their prices can aid
the CBTT in fine tuning its monetary policy
as it tries to maintain a stable inflationary envi-
ronment, as well as policymakers more gen-
The study drew its sample from the Survey
of Business Establishments database for 2011
maintained by the T&T Central Statistical Office
(CSO). The CSO provided a sample stratified
by industry and size, with size being determined
according to the number of employees in each
"According to the survey, quality is the most
important factor for competitiveness, followed
by price," the economists wrote.
The authors omitted companies from the
financial sector, the energy sector as well as
non-profit institutions. Financial sector com-
panies were omitted because of the difficulty
of determining a main product in this sector.
Companies in the energy sector were also omit-
ted since the prices of energy products are pri-
marily determined on the international mar-
ket.There was wide coverage of both manufac-
turers and services providers. The survey was
administered during the period August to
December 2011 to 250 businesses in T&T by
traditional mail. Staff members followed up
with telephone calls and e-mails.
Of the 196 firms contacted, 63 firms respond-
ed, resulting in a response rate of 32 per cent.
The authors considered this response rate
acceptable, given that in the studies in more
developed countries the response rates ranged
from 36 per cent (Austria) to 69 per cent (Spain).
Small firms (firms with less than 25 employ-
ees), accounted for approximately 49 per cent
of the responses, large firms (firms with 51 and
more employees) represented 38 per cent of
the responses, with medium firms making up
the remaining 13 per cent. The responding firms
could be also grouped into five sectors, food
manufacturing, other manufacturing, construc-
tion services, distribution services and other
Of these, other manufacturing accounted for
33 per cent of the responses, food manufacturing
and construction services each accounted for
13 per cent of the responses, while distribution
services represented some 22 per cent of the
responses, and other services made up the
remaining 19 per cent.
T&T as the main market
Approximately 95 per cent of all firms iden-
tified T&T as their main market, the paper
"While this seems natural for firms in the
construction, distribution and other services
categories, the proportion of firms in the food
manufacturing (85.7 per cent) and other man-
ufacturing sectors (89.5 per cent) selling mainly
to T&T was also high," the authors wrote.
The high proportion of firms focusing on
the domestic market also reflected the fact that
the energy companies---who are the country's
main exporters---were excluded from the survey,
the authors said.
Firms for which the domestic market was
not the main market identified either the United
States or Caricom countries as their main mar-
kets. The importance of the local market for
firms in this survey means that the investigation
speaks mostly of firms' price setting behaviour
in the T&T market.
Small firms showed a higher degree of open-
ness with approximately seven per cent selling
mainly to a foreign market, but they also report-
ed a lower share of total turnover due to exports
compared to the medium and large categories.
Consistent with the finding that manufac-
turing firms are more export oriented, export
earnings comprised a higher proportion of total
turnover for the food manufacturing (15.9 per
cent) and other manufacturing sectors (9.7 per
cent) than for construction (3.4 per cent) and
other services (4.5 per cent).
The low level of service exports is noteworthy,
the authors said, given the trend for the inclusion
of services liberalisation in negotiating trade
"The sample results seem quite representative
of the various modes of disposition of product.
Many firms sold their main product directly
to consumers (25.9 per cent) while about the
same proportion sold to retailers, and slightly
fewer (24.1 per cent) sold directly to companies,"
the study said.
Degree of competition
Questions 6 and 7 of the survey were designed
to help determine the degree of competition
faced by firms. Overall, 41.7 per cent of firms
reported having between five and 10 competitors
in their main market, and 56.2 per cent of them
had a market share less than or equal to 20 per
"In general, then, firms appeared to have
limited market power," the economists said.
"But large firms had more market power, with
26.1 per cent of them enjoying between 51 to
99 per cent of market share compared to 11.1
per cent of small firms."
However, the picture of substantial compe-
tition in the domestic market changes when
firms were asked about what would happen to
the quantities they sold if they increased the
price of their main product by ten per cent.
Some 40 per cent reported that there will
be no change, led by construction and firms
in the other services sectors, where demand
tended more towards inelasticity. This inelasticity
seems to be mirrored in the level of autonomy
these companies have over their prices: 73 per
cent of firms reported that they set their own
prices, the study said.
In assessing how firms charge different prices
to different groups of consumers for an identical
good or service, firms were asked if they charged
all customers a uniform price or whether the
price varied according to quantity, or on a case-
"The evidence supports what would be
expected intuitively, ie. quantity purchased was
important in receiving a more favorable price,"
the economists said.
"Only 28 per cent of all firms charge the
same price to all their customers, while 33 per
cent discriminate according to the quantity
they sell, and 39 per cent on a case-by-case
basis," they said.
Construction and non-distribution services
show high discretionary pricing power as 88
per cent and 45 per cent, respectively, of firms
determined the price of their product by case.
Interestingly, the study said, small firms seem
more inclined to differentiate their prices than
larger firms, with only 27 per cent of these
firms claiming to charge the same price to all
customers compared to 33 per cent of large
The study also set out to determine if prices
were set on a time-dependent or on a state-
dependent basis. The time-dependent rule refers
to pricing mechanisms where prices are reviewed
at some well-defined frequency (annually or
quarterly). In state-dependent pricing models,
the price is changed as a function of significantly
altered market conditions.
The results of the study showed that under
normal circumstances 40 per cent of firms
follow state-dependent pricing, reviewing as a
result of specific shocks. However, 40 per cent
of firms reported using a combination of time-
and state-dependent pricing, while only 20 per
cent followed purely time-dependent pricing
Differences across sectors exist as time-depen-
dent rules predominate for services and con-
struction firms while the hybrid strategy is most
popular for food manufacturing firms. Results
also showed, the economists said, that medi-
um-sized firms generally prefer a combination
of time and state dependent pricing rules.
T&T firms were asked about the information
set they consider when they review their prices.
The majority of firms (53 per cent) review their
prices based on current and past information
compared to the 25 per cent which use recent
and future information, including expectations
about future economic developments. Some 22
per cent of firms simply adopt a rule-of- thumb
approach based for instance on the overall retail
price index or on wage growth.
Frequent price reviews,
less frequent price changes
The degree of price rigidity could also be
gauged using the frequency of price reviews
and price changes obtained by survey analysis.
Firms could be expected to review their pricing
regularly if it were not costly to do so, the study
However, the small proportion of firms
reviewing their prices at least once per month
suggests that the review process may be costly
and menu costs may also play a role here. More-
over, perhaps reflecting the costs factor, 50 per
cent of firms adopting time-dependent rules
review their prices no more than once a year.
Comparing results across sectors, the data
showed that price reviews are more frequent
in food manufacturing than in other sectors;
this is understandable given the high volatility
in food prices, as measured by the retail price
index (RPI), which firms may have to consider
regularly. The majority of firms review their
prices once per year, but small firms do it twice
per year, probably because they may not be
able to absorb cost increases for longer periods
The question of how often prices were actu-
ally changed was asked. The results for firms
that responded both to the question on price
reviews and the question on price changes show
that most firms change prices less frequently
than they review them. However, large firms
and the construction and distribution sectors
tend to change prices as often as they review
them, the study said.
Although 63 per cent of the firms change
their price just once in a year, they do not seem
to have a particular month when they do so,
the study found. Only 38 per cent of firms
answered that they change their price in a spe-
cific month of the year, which tends to be Sep-
tember, January or December in most cases.
This could be related to seasonal factors such
as the end of the fiscal year, the start of the
school year, and the Christmas period.
Direction and magnitude
of price changes
The survey also provided insights into the
direction of price changes in the economy. On
average, 40 per cent of the last ten price changes
made by the companies were price reductions.
Downward price rigidity was higher in large
firms and the food manufacturing sector, with
63 per cent of these firms reporting that their
last ten price changes were increases.
An examination of the difference in the mag-
nitude of the last 10 price changes finds that
over average price increases were greater than
price decreases. From a sectoral basis, the
service sector followed by the construction
sector led in terms of the size of price increases.
Meanwhile, medium and large firms reported
the largest price increases. The smallest price
decreases are evident in the construction sector.
The largest price decreases is in medium size
firms, the study said.
In respect of the magnitude of price change,
the 2011 study also found that price increases
were normally larger than price decreases. Price
increases were on average 4.03 per cent while
prices decreased by 2.11 per cent on average.
Service type products namely café and restau-
rants, education and transport give the largest
index increases ranging from three to 14 per
cent, consistent with survey results.
In summary, the economists said: "There is
price rigidity in T&T as measured by firms'
frequency of price reviews, factors considered
when reviewing prices and frequency and dura-
tion of price changes.
As in many other countries, price reviews
are generally infrequent, perhaps because of
the associated costs, and these reviews are
most often not undertaken at a set frequency.
Further, firms change prices less frequently
than they review them. Finally, the magnitude
of price increases is greater than that of price
Central Bank working paper:
Quality more important
than price in T&T market
Links Archive July 9th 2014 July 11th 2014 Navigation Previous Page Next Page