In this research I shall seek to show the need to do a correlation research between the prices
(where quality is constant) and the demand of mobile phone in Kenya.
Systematic sampling will be used to select the respondents of the research, who will be mobile
phone dealers in Kenya. The research shall specifically be focused in the change prices of a cell
phone without change in other aspects, a situation provided by the introduction of the VAT Act
2013, in Kenya.
1.1 Background the study
The relationship between price and demand has been extensively studied with a lot of
varying factors, and conclusions made. It is however, not easy to assume that, the models
already developed are usefully applicable, to any situation. The introduction of VAT law
in Kenya, brought a debate among the various elitist including managers, where others
believed that, the increase in price would have no effect of the mobile-phone market in
Kenya and others argued otherwise. This proposed study shall attempt to answer the
questions asked, related to effect of change in price to demand in the mobile-phone
British economist David R. Henderson noted in his article, Demand, noted that, “One of
the most important building blocks of economic analysis is the concept of demand. When
economists refer to demand, they usually have in mind not just a single quantity demand,
but a demand curve which traces the quantity of goods or services that is demanded at
successively different prices.” (Henderson, 2008) . The Kenya government, through the
Kenya Authority (KRA) differed with a group of mobile dealers on the effect of
introduction of the VAT Act 2013 where the later believed that holding the view that the
heightening of prices of the handsets will reduced market penetration (which was at
30%), but the government argued otherwise demanding evidence from the dealers
(Star_News_Paper, 2013) .
VAT, brings a long string of variation when changed in an economy. With consumers
considered to be seeking maximum utility (satisfaction) from a bundle of goods and
services. Anything that affect their level of expenditure, may as well cause the demand of
some commodities (depending on their preferences) to change. It would however not be
possible or will be expensive to focus on all the direct and indirect impact of an increase
or decrease in VAT rate.
Focusing on the price and demand levels, which were affected by the increase in VAT,
will be less expensive and the data will be representative of the facts known to everyone,
making conveniently easy to persuade the possible users of the study to implement the
final recommendation, I will provide.
To come up with a useful demand schedule, this research will be covering a wide range
of time, more than 20 months. The end result shall be a demand curve, which shall help
in future decision making.
1.2 Statement of problem.
Mobile phones’ market in Kenya has from the recent years been seen as one of the
major contributor to economic development in Kenya (World_Bank, 2012) . It
therefore, is a very important sector to manage. Any decision that affects this market
should be analyzed comprehensively so as not to cause a negative impact to the
sector and consequently to the economy at large.
The lack of accurate references during arguments that affects this market, especially
changing the prices, is risky; therefore, a demand of this study is relevantly high
because of its importance.
1.3 Objective of the study.
1.3.1 General objectives
1. Identify the relationship between the demand of mobile phone in Kenya and
change in their prices.
2. Suggest the best ways of price management in the mobile phone market.
1.3.2 Specific objectives
1. By the end of this study, I shall be able to observe and state the change in
demand of mobile phones, after implementation of the VAT Act 2013 in Kenya.
2. Come up with a report containing an analysis of the effects introduced by the
VAT Act 2013 in Kenya (on mobile phones market).
1.3.3 Research questions.
1. Does the change of VAT rates inform the decisions of mobile phone buyers?
2. Does the change of price (with other factors constant) affect the demand of
1.3.4 Research hypothesis
1. H o Change of VAT rates does not inform the decision of the mobile phone
H A Change of VAT rates informs the decision of the mobile phone buyers.
2. H o Change of price (with other factors constant) does not affect the demand of
mobile phones in Kenya.
H A Change of price (with other factors constant) affects the demand of mobile
phones in Kenya.
1.3.5 Scope of the study
This study shall be carried out only in Kenya as indicated in the title. Strategic sampling
shall be applied to ensure accuracy and less biasness. Only records from mobile stores
shall be obtained. The study will also only focus on the records of year 2012 and 2013,
where focus shall be directed towards the nature of the demand curve after the
implementation of the VAT Act 2013.
Though research is intended to provide information on the effects of VAT on mobile
phones market, price shall be the only factor I will consider as a function (dependent
variable) of VAT, but demand is its (price) function.
1.3.6 Significance of the study.
This research shall be of great benefit to the government and opinion leaders, when
contemplating on an increase of price (through VAT). It shall also bring (hopefully), new
knowledge about the relationship between demand and price in the field of technology,
especially in Kenya (developing economy).
1.3.7 Assumptions and limitations.
In this research, I will assume that the demand curve is only (significantly) affected
by the change in price. This however may not be true as income and other factors
affecting the demand may have occurred. However, the risk of this assumption will
be reduced by a collecting data of up to 22 months time i.e. 2012/2013.
I will also rely on the assumption that all the respondents, will have kept accurate
records and that they be willing to share the information. In view of this challenge, I
shall pick a larger group of respondents to ensure that non-response or misleading
information does not affect the end results.
Lack of enough resources to collect these data within time, is a limitation I will be
In this chapter, I will make a review of works already done and the general theories of
the market’s demand and price.
2.1 Theoretical literature.
In microeconomics, demand curve is ordinarily expected to be negatively sloped for
a normal good, as shown in Figure 1 , below. In this case a change in price will cause
an inverse change of demand, such that, if price was to be increased, the demand will
The use of price of a commodity as the only function of demand may however, not be
conclusive. But with the spread in time and different ranges of phone models, the trend shall
be observable and an accurate conclusion made.
2.3 Empirical literature.
A study was carried in Germany, “Economic Effects of VAT reforms in Germany”, by Stefan
Boeters a et al, with a conclusion that variance in VAT is negligible and does not affect the
economy significantly (Stefan Boeters, 2008) .
An inquiry (The effect of the VAT Rate change on Aggregate Consumption and Economic
Growth) was also made by Niki Bumpei and its report published in the published in an online
platform Academic Comons. The research was “carried in up to 14 developed countries” The
paper identified three trends of an in an event of VAT variation, these are; Just before the
increase of VAT, the aggregate consumption and economic level increases and vise versa; That
the level of consumption and economic development drops immediately a reduction in VAT
Normal demand curve Price
occurs; Thirdly, after the dramatic increase or decrease there is a gradual change (Bumpei,
2.4 Literature guided by objectives.
In the two cited works, both were not carried out in Kenya and many factors were considered in
determining the trends (not specifically phones market). This study will therefore, fill a large
2.5 Gaps filled by the study.
This study will provide up-to-date and specific information which no other study has provided
with the same scope and with similar factors. Where, in case of any noticeable change of the
demand curve during the process of introducing the VAT bill, one will be able to relate the
consumer’s behavior and the price changes caused by the introduction of the 16% VAT rate.
2.6 Conceptual framework.
Increase In price Decrease in price
Change in VAT
CHANGE IN PRODUCT’S DEMAND
Figure 2 , Shows a conceptual from work of how VAT affects demand, where demand depends
on the change in price but not directly on the change in the VAT rates.
In this chapter, the design of the research shall be stated. The process of data collection
shall be shown, by identifying the target population of despondences, tool to be used in
collection of data and finally the procedure of data analysis.
3.1 Research Design.
This research shall focus on finding out the relationship between the demand of mobile
phones in Kenya and the change in VAT. It is a Correlation Research, as such it shall
hopefully provide a basis of prediction of change in demand in an event where a change
in VAT rate is contemplated.
3.2 The target population.
The study shall be carried out by interviewing mobile retail dealers in all over Kenya,
where their business records shall be used as data for this research.
3.3 Sampling strategy.
The research shall be carried out by studying 20 retail phone sellers in every county in
Kenya, who have been in business since 2012, this is to avoid duplication of records by
mixing data from retailers and wholesalers. The shops will be randomly selected,
ensuring that they are evenly distributed across each county.
3.4 Data collection tools and Techniques.
A questionnaire will be used in collection of data, with a table containing all months
from January 2012, recording the sales of each month, the model of the phone and their
The data will feed into a data management system (Ms Access), where they’ll be sorted
according to models for easy analysis.
3.5 Data analysis.
After collection and creating an electronic database, different graphs will be created for
each model of phones, where the number of phones are in the X axis and Y axis
containing their prices. A graph containing an aggregated demand and shall also be
created, be averaging demand and prices.
To identify the strength of the relationship between the two variables (i.e price and
demand) and to enable prediction a correlation coefficient shall be calculated for each
curve drawn 1 .
1 Coefficient of correlation
Bumpei, M. (2011). The Effects of VAT Rate change. Retrieved from Academic Commons:
Henderson, D. (2008). Demand: . Retrieved from The Concise Encyclopedia of Ecomics | Library of
Economics and Liberty: http://www.econlib.org/library/Demand.html
Star_News_Paper. (2013, July). KRA tells off mobile phone makers over VAT Bill | The star. Retrieved
from The star: http://www.the-star.co.ke/news/article-133561/kra-tells-mobile-phone-makers-
Stefan Boeters. (2008). Economic effects of VAT reforms in German. London.
World_Bank. (2012). Africa Can End Poverty. Retrieved from Africa Can End Poverty: