Pricing in the informal sector: Evidence from Zimbabwe's urban informal metal firms

Abstract

The main purpose of this paper is to investigate the price-setting behavior of Zimbabwe's urban informal metal firms. In order to achieve this objective, data collected from 647 urban informal metal entrepreneurs is used. The study reveals that the majority of urban informal metal enterprises' customers are households and individuals. Empirical results indicate that urban informal metal entrepreneurs do not set their prices in a chaotic manner but use established economic principles of setting prices. Cost-plus and bargaining are the most popular theories recognized by the entrepreneurs. The cost-plus technique is the dominant strategy used by entrepreneurs followed by the bargaining strategy. While the cost-plus technique suggests uniform prices, this is rejected by the bargaining strategy which suggests that prices are set on a case-by-case basis. Evidence suggests that the entrepreneurs' pricing decisions are mainly influenced by cost factors. Apart from covering production costs the entrepreneurs' pricing decisions also emphasize 'ethical objectives' by charging 'what the market will bear'. From the two dominant pricing strategies, two issues are central to the entrepreneurs' pricing decisions that is, covering costs of production and minimizing the loss of customers.