Are we getting parity pricing on our mobile phone services in Southern Africa?
As the African region becomes closely knit, economic agents constantly seek to take advantage of pricing differences between countries presenting arbitrage opportunities which economic agents are continuously seeking to gain additional value from. Well the usual way to conduct this exercise is using typical commodities that are commonly and directly traded, typically we are talking about food or essential commodities, which exist in all the national markets across the region. So as soon as people realise they are price differences between two places that they can geographically reach, they obviously buy from the location with the lower price, take those goods to sell in the location with a higher price – that’s arbitrage trading in economics.
Economists have a peculiar theory, Purchasing Power Parity based on the Law of One Price, which is highly theoretical but assists policy makers in making decisions regarding the economy. Well suited for countries were inflationary pressures are prevalent and policy makers would like to benchmark their interest rate or trade policy decisions. The simple idea of Purchasing Power Parity is based on the Law of One Price (LOP) which formally states any good traded in a common market should sell for the same price in all the countries involved in the trade of the good, given a common currency Pakko and Pollard highlight in their Burgernomics Guide for the St. Louis Federal Reserve in 2003. Analogously the common market is Africa, so one would pretty much expect the price of a 500ml cooking oil bottle in a Spar Supermarket in Lusaka, Zambia to be the same as the one in Johannesburg, South Africa. Anyway it is not always as easy as that because there are other things to consider etc. but the thinking process is the same.
So today let us look at the pricing on something that we use across the region to go about our daily lives, well it’s not an edible commodity, but surely it has become a tool of necessity over the turn of the century. The mobile phone is useful tool in Africa, functional applications assist economic agents to go about their productive lives, be it in Agriculture, Payments etc. So let’s simply look at the pricing on mobile phone services in Sub-Saharan Africa countries and see if they measure up to the same unit after taking into account the different exchange rates, well our key assumption is the tradability of these services are set-off via roaming agreements, infrastructure sharing and support service resources. A simple research benchmark created by the OECD (Organisation for Economic Cooperation and Development) will make this ‘light-hearted’ approach to the parity pricing discussion on mobile phone services easier as depicted in an adapted table below:
Relative Prepaid Product Pricing (Q4 2014) Southern African Countries
Adapted from Research ICT www.researchictafrica.net (2016)
So according the theory we mentioned above on Law of One Price and Purchasing Power Parity, we are supposed to have prices closer to US$ 1, after all exchange rate translations are done. Historically from the numbers mobile phone services have been relatively expensive in most Southern African countries but have moderated recently due to increasing user bases for the broad mobile phone services. Another view on pricing parity, which could infer the degree of integration on the African region, is informed by the causality based on synonymous socio-economic systems across Africa i.e. common official languages, judicial procedures, geographical proximity and so on. From a correlation matrix compiled from the pricing panel data above between 2011 and 2014, show price ratio results that inform price parity on the following combinations (1) Lesotho, Namibia, South Africa and Swaziland and; (2) Malawi, Tanzania and Zambia.
So much for this little experiment, the discussion on pricing parity using price ratios and exchange rates contributes quite a lot to trade policy and development economics. So much is happening on the ground there is a lot of improvement in bi-lateral relations between regional countries, travel, tourism and cultural exchange – although there is still much more to be achieved for a solid and common Africa to be achieved. As Aliko Dangote, an African Investor and Philanthropist would say he needs multiple African visas to travel on the home continent, mobility of factor resources and much more needs attention.
Article by James Musakanya
For Positivity Global (Africa)