Mark-up Pricing in South Africa

Govender and Holland (2013) report the results of a survey from May to August 2012 on the pricing behaviour of 34 manufacturing firms in South Africa on the prices of their main products (Govender and Holland 2013: 2). Though a somewhat limited sample, it is nevertheless interesting.

It was found that 73.5% firms said that price setting on the basis of direct costs plus a variable percentage mark-up was either a “very important” (38.2%) or “fairly important” (35.3%) form of price setting (Govender and Holland 2013: 3).

And 55.9% of firms said that price setting on the basis of direct cost plus a fixed percentage mark-up was either a “very important” (35.3%) or “fairly important” (20.6%) form of price setting (Govender and Holland 2013: 3).

It is interesting that, at the same time, it was found that 58.9% of firms said that price setting on the basis of “competitors’ price” was either a very important (32.4%) or fairly important (26.5%) form of price setting (Govender and Holland 2013: 3) – a result which does not contradict the previous findings because many mark-up pricing firms follow a mark-up “price leader” in their particular market which influences their price and the extent of their mark-up.

Therefore the high percentage found in the “competitors’ price” category is not necessarily evidence of widespread flexible pricing or prices set by supply and demand dynamics at all, but compatible with what is known about mark-up pricing.

The survey also found that 67.6% of firms said that a rise in price from a rise in fixed costs was either “very important” (29.4%) or “fairly important” (38.2%) (Govender and Holland 2013: 6) in price setting. This confirms that fixed/overhead costs are important in mark-up pricing, contrary to neoclassical theory.

Govender and Holland (2013: 6) conclude rightly that this suggests that “marginal cost pricing is not practised significantly by firms and total-cost plus pricing policies are commonly used by firms.”

Only 41.2% of firms said an actual rise in demand was either a “very important” (20.6%) or fairly important (20.6%) cause of increases in prices (Govender and Holland 2013: 6).

BIBLIOGRAPHY
Govender, Neelan and Mike Holland. 2013. “Pricing Behaviour in Manufacturing Industry in South Africa: Implications for Competition Policy,” Seventh Annual Conference on Competition Economics and Policy, 5th September, Johannesburg.
http://www.pricemetrics.co.za/sg_userfiles/Pricing_Behaviour_in_Manufacturing_Industry_Paper_Final.pdf