Of price and menus: sleeping with bogus Prices
The latest currency devaluation reveals one of the many strategies by which traders inflate the market to set a new false price. As sources from Addis Ababa disclosed to Addis Neger Online, major wholesalers were able to convince retailers to adjust new prices almost immediately upon verifying that the devaluation of the Birr was true.
The saying goes, “Menus are in a state of flux, while quantity and quality are diminishing consistently.” Any devoted patron of restaurants in Addis Ababa can recognize this immediately. For these restaurants, increasing prices is an easy task. On any given day, within hours, a menu may be assigned different colors, price lists may be erased or a waitress may be ready to announce the new price changes in a breathless descending order. Unfortunately, no positive correlation can be seen between quality and price; they are inversely related.
In most cases, supply affects the true upward movement of prices within the Ethiopian economy, although shortages are not the only factor to push prices up. The behavior of the market actors—namely, consumers and service providers plays a significant role as well. In fact, within an economy in which the informal market occupies the dominant role, maintaining current prices or driving them upwards up depends on how the traders perceive their activities within the economy. Since most Ethiopian service providers and traders consider themselves “market makers”, decisions are simply made without adequate cost-benefit analysis and consideration of the other agent, the consumer, as an important decision maker.
Recently, trading in Addis has become increasingly perceived as a means to climb to a higher economic stratum at lightning speed and without exerting much effort. The mere possession of start-up capital is regarded as a sufficient condition for entering the market, while calculations of true profit margin are left aside for academic works. So it is not uncommon to see that a 10 percent increase, for instance, in the price of a kilo of onions alone might lead a restaurant owner to swell the price of tibbes by 20 percent.
Setting the right price appears to be a difficult task. Product quality, cost of production, promotional expenses and many more considerations for price setting are not workable for the Ethiopian market. Despite the fact that the existences of high information asymmetry, weak policy instruments and government’s double standard rules are considered as major reasons for market failure, the behaviour of consumers and traders has great impact
The latest currency devaluation reveals one of the many strategies by which traders inflate the market to set a new false price. As sources from Addis Ababa disclosed to Addis Neger Online, major wholesalers were able to convince retailers to adjust new prices almost immediately upon verifying that the devaluation of the Birr was true.
“For the last two months there were not any price changes when I bought cell phone accessories from my supplier, who provides them solely to me. My supplier and I agreed on the prices at which I will sell the accessories to other vendors. For instance, if I buy a Nokia apparatus for 20 Birr, I sell it for 25 to another vender. But last week he ordered me to increase the prices by 20 percent,” a cell phone apparatus vender explained.
According to him, he had already paid for all the goods that he purchased and could still fetch profit without any price adjustments following the devaluation. But, because the wholesaler is the dominant decision-maker in such a market, refusing to increase prices may come at significant cost to retailers. So, they accept his orders, passing the final cost burden onto the final customer.
Fortunately, traders are backed by consumers’ behaviour. They are rewarded by both the excess money earned above the normal profit and the risk-averting behavior of customers. As it has been seen in the aggregate political arena in today’s Ethiopia, Addis consumers are critically engaged in a state of risk aversion. Rather than determining the real reason behind the skyrocketing prices and then making an informed decision, the consumer instead demonstrates a willingness to pay whatever is asked–fearing that the next day the prices may rise further, as if the trader is the only decision maker in the market.
Such consumer behaviors, accompanied by traders’ irrational decisions and supply problems, play their own negative roles in the economy. Consumers cannot save any portion of their monthly earnings. As recorded data from the National Bank of Ethiopia shows, Gross Domestic Saving is still weak, accounting for just four percent of the Gross Domestic Product of the nation. This creates a resource gap for sustainable investment.
Despite the fact that much research deals with the issue of risk averting behaviour and its impacts on the economy in rural house holdings, it seems impossible to find even one research work on the risk averting behavior of Ethiopian consumers as a whole. Such research might provide an accurate picture for policy makers and decision makers. Until then, the traders will maintain their seat as king and drive the market according to their needs.
The big question is, are they raising peoples sallary based on the value and the economoce growth that they talk about? and how about privet sectors and there employ’s? If every body have to pay more for what ever including food? employ’s needs to get paid more. And if they are smart they can hold on to some of the money until the value goes normal and they will have some more money than usual.
But that is taking a chance isn’t it?
Just be more productive. that is the best way to go about it to solve the problem.
Right on about the research. I think Ethiopia should be heaven for behavioural economics research.
Anyway, no matter what the irrational habits of the Ethiopian consumer and trader, in the end, we’ll reach equilibrium. It takes a longer time than it would countries with more efficient markets, but it will happen. In the process, traders who set their prices too high and consumers who’ve bought too high will suffer the costs as prices come back down from initial peaks.
As for the savings problem, the major factor is that so many people have such low incomes. Specifically the 85% or so rural population living on farms that barely sustain them let alone provide them with savings. As long as the EPRDF persists with its archaic land policy and does not ‘allow’ natural migration from rural to urban, this huge marginalized population will always remain with us.
D
If price for goods go up (selling an buying) there is no even one reason why peoples sallarey can’t go up. It has to. And that is the only why this can work despite less productes on the market which I think
can be the cause or the case to this money devaluation.
And as you said the land policy is the big problem for productivity. Though that being addressed the whole country
needs to think about labour value’s and it’s market. Because whether intellect’s or farmers or a doctor or teacher or who ever employ (man power) is the real source of economy for any country.
So that needs to be addressed as well and go about it the same way like every thing els.
Correction
I meant to say……’that is the only way that this can work’.
And if that is done? we are safe and sound. It will be a matter of less paper and more paper in your wallet.
The consumer is somewhat justified in assuming prices will be higher tomorrow than today. Since the time of the Emperor prices have almost always have gone up and rarely if at all come down.
And one more thing.
Farming for the local market has to be taken very serious bay every one who has the capacity to do it.
ECX or who ever organization can be use full for finding comercial markets for the farmers as long as they care about the farmers profit and developemnt as well as theirs.
But since food in the big insecurity in our country today, any who body who could should farm some thing even if it is in our back yard’sto make food cheeper for the local market.
If one grows a tometo and one a karia and one a shenkurt and every thing els, even if there isn’t any money in our pocket
we can exchainge those and servive like the old days if we have too until some thing changes.
And they make a big deal out of seeds. Well I am sure it is in the thing. If you know what I mean. We just have to may bee learn a little may bee from farmers or use our sense’s to figer it out and do what wee need to do to have more small and big farmers in Ethiopia.
After all It needs to be understood that we farm to eat not eat to farm.
Excellent analysis !
Zerihu:
As a regular of addisnegeronline.com, and a frequent reader of your commentary, I like what you have writing so far. I am disappointed with this one, however. First of all, I could not make anything out of the entire article, for it is a hodgepodge of many issues. Let me take a few phrases from your write-ups, as this one to make my point: “traders inflate the market to set a new false price…” What false price are you talking about? The devaluation is real and the value of the birr has declined by 20% OVERNIGHT! As merchant, you will be foolish if you fail to adjust your prices right away. In fact, the adjustment should be greater than 20% because of the many uncertainities that the devaluation has caused. Second, there are additional costs, such menu costs, etc. Indeed, some local merchants may be using the opportunity to raise their prices even though most or all of the products they carry could be domestically made, but those businesses who carry imported products should be expected to raise their prices right away and it would have been irrational if they did not do so!
You also seem to suggest that consumers are either myopic or are less careful about the money they spend. This makes no sense and even my grandmother knows it. You could say that whatever is price the merchants ask has been paid by the consumers. This can only happen if either the consumers can afford to pay the higher prices or there is a shortage, the latter being the case in Ethiopia than the former.
Also, blaming traders is just like the Ethiopian saying: Ahiyawun fferto dawllawun. The problem is not the traders, it is the devaluation and the shortages!
For anyone who wants to know more about the impact and consequences of the devaluation, one can look for a recent article written by Seid Hassan on the web a read. This article is being xeroxed all over the country and being distributed.
Let me stop here for now.
Ali Shifaw
Correction:
I think you did not consider the motive of maintaining the real value of imported commodities constant in dollar terms. If importers do not adjust their price upward, their working capital (in dollar terms) will be depleted. This is a rational response to any devaluation. So, lets not blame them at least on this ground.
Blaming merchants for increasing price on the ground of devaluation of Birr is silly.The value of Birr went down by 20% overnight. So, why would they sell their goods at cheaper prices compared to new arrival of goods?
SPEAKING OF BUSINESS ANY WAYS WE SHOULD ALWAYS LOOK AT
WHAT’ S GOING ON IN THE WORLD. AND WHO’S MONEY IS STRONGER THAN WHO’S. AND WHAT ARE THE VALUE’S?
EVEN THOUGH I THINK IT ALTIMETLY DEPENDS ON PEOPLE’S
PRODUCTIVITY AND CREATIVITY AND THOUGHTFULLNESS, ALONG
WITH OUR COUNTRY’S NATURAL RESOURCES THAT HOLDS FOR US. AND OF COURCE HOW WE DEAL WITH IT? HOW WE MANEGE IT ALSO MATTERS. WHEN I SAY IT I MEAN EVERY THING INCLUDING
THE PEOPLE.
I MEAN INCLUDING HOW YOU MANEG THE PEOPLE.