Decentralised pricing with motivated agents: Evidence from Tanzania

Project Active from to State

A central assumption in economic models is that agents make choices that maximise their own utility and profit. A growing literature has, however, highlighted that in many instances agents appear to make choices that are inconsistent with profit maximisation.

This project focuses on the market for publicly subsidised livestock vaccines in Tanzania. The Tanzanian government produces and distributes a vaccine against Newcastle Disease, a viral and lethal poultry infection, through a network of public extension agents who visit farmers and apply the vaccine. A market for this vaccine arises because the distribution process is financed through user charges. Due to the absence of competition and regulation, agents have substantial discretion over what they charge each farmer. This project assesses whether agents choose prices consistent with individual profit maximisation or whether they rely on rules-of-thumb when setting prices for user charges. The empirical investigation presents two pieces of evidence which support the notion that agents use simplified heuristics (rules-of-thumb) when setting prices.

Large-scale field experiment

First, evidence from a large-scale field experiment with 832 service delivery agents shows that imposing a lump-sum tax on agents does not induce market exit but leads agents to raise prices. As the amount of taxes collected is independent of the number of sales made, this suggests that agents base their pricing decisions on average and not on marginal costs. While this behaviour is inconsistent with standard theories of monopolistic price setting, it is consistent with rules-of-thumb in which agents consider average costs as an estimate of marginal costs. This conclusion is supported by the fact that imposing a lump-sum tax does not affect the amount of revenue collected by agents.

Lab-in-the-field experiment

This project also provides evidence from a lab-in-the-field experiment which was conducted with a representative subset of the agents from the field experiment. The lab-in-the-field experiment was designed to find out what agents consider when they make pricing decisions. To this end, participants were given a scenario that mirrors the decisions typically made on the supply side of the vaccination market and were asked to make financially incentivised pricing decisions. We find that imposing a fixed cost significantly increases the minimum price that agents set, which is inconsistent with optimal pricing. Instead, it suggests that agents rely on rules-of-thumb relating to average costs, in which case minimum prices should respond to the imposition of a fixed cost. Taken together, this result provides direct evidence that agents rely on simplified heuristics when making complicated pricing decisions.

While the empirical results provide evidence that agents do indeed choose prices based on rules-of-thumb, it is not clear how this behaviour affects overall economic outcomes. For example, the results from the field experiment indicate that agents supply a larger quantity of vaccines than a purely profit-maximising monopolist would. This behaviour could potentially reduce distortions caused by monopolistic pricing. As part of on-going work, this project investigates how the prevalence of average cost pricing affects welfare in the market for livestock vaccinations.