Social concerns impede price competition among small firms: Experimental evidence from Tanzania

Abstract

The researcher ran a field experiment with 561 food retailers in urban Tanzania to answer 3 questions.

• Do concerns about social sanctions reduce entrepreneurs' willingness to undercut the prices of competitors?

• How variable is the compensation required for firms to engage in such price competition?

• When experimentally incentivised to undercut their competitor's prices, do entrepreneurs update their beliefs about the social costs of competition?

This analysis led to 3 main findings.

1. Firms are hesitant to undercut their competitors even when doing so is guaranteed to raise profits. At baseline, only 33% of retailers are willing to undercut others; unwilling retailers substantially overestimate the anger that others have towards undercutting.

2. Firm beliefs about the severity of social sanctions vary widely. Among those that are willing to undercut, the required compensation varies from a 25 − 520% increase in their maize flour profit margin.

3. Firms seem to learn via the experiment that social sanctions are less severe than they initially believed. After the first round, 33% more firms are willing to undercut others in a second round of treatment, and the subsidies they require are 30 − 39% smaller on average.

The author's findings suggest that social concerns impede price competition among small firms, but that those concerns can be partially overcome with temporary experimentation.

There is a working paper and research report for this project. They are part of the Private Enterprise Development in Low Income Countries (PEDL) programme.

Citations

Norton B. 'Social concerns impede price competition among small firms: Experimental evidence from Tanzania' PEDL: Research notes, GRP, 2026

Norton B.'Social concerns impede price competition among small firms: Experimental evidence from Tanzania' PEDL: Working paper, GRP, 2026

Links

Social concerns impede price competition among small firms: Experimental evidence from Tanzania: research report

Social concerns impede price competition among small firms: Experimental evidence from Tanzania: working paper