Dynamic pricing equations are estimated using an error correction model, with data on a panel of 89 Australian manufacturing industries for the 14 years, 1971172 through 1984/85. The overall pattern is consistent with prices approximately following a fixed mark‐up rule in low concentration industries, while the mark‐up factor in high concentration industries is strongly pro‐cyclical. Also, in high concentration industries that are heavily exposed to import competition, the mark‐up factor increases with prices of foreign competing products and with the general price level for domestic manufactures.
1 The weights used for consistent aggregation differ slightly between prices and unit direct cost when the mark-up factor varies across products. Consistent aggregation for average price is achieved with pd = C,sd,pd,, subject to Z,sd, = 1, where sd, is the share of the ith producer in total value of output of domestic producers.
The standard quadratic price adjustment cost function makes no allowance for firm size or for scale economies. Incorporating quadratic price adjustment costs into the profit function, a firm's speed of price adjustment is both shown to be a positive/negative function of its size when firms have scale economies/diseconomies with regard to these costs and to be a negative function of market power. The intuitive explanation is that large firms that can defray this type of cost have less reason to slow price adjustment, while firms with market power are better able to offset price adjustment costs by slowing their speed of price adjustment. These results are used to derive an industry error correction model of pricing where the speed of price adjustment is a weighted average of the firm effects. Estimation of the model is carried out on data obtained from nine two-digit Australian manufacturing industries during the period 1994:3 to 2002:2. The empirical results suggest that the speed of price adjustment is positively related to the size of firms within an industry and negatively related to industry concentration. Given that these variables do not change rapidly over time, they are likely to have a steadying influence on the speed of price adjustment at an aggregate level in the face of changes to monetary and fiscal policy.JEL Classification: D21, L11, L13, L16, L60
A Hall type model that includes intermediate materials in the production function and allows for non-stochastic time variation in the contribution of technical change to output growth is used to estimate markup and returns to scale for eight Australian manufacturing industries at approximately the two-digit level, during the period 1971-72 to 1984-85. Six of the eight manufacturing industries indicate markups that are greater than one, implying the widespread existence of market power in Australian manufacturing. Constant returns to scale are not rejected for any individual industry or jointly. Markups are generally found to be pro-cyclical, although there is some evidence to suggest that this relationship is not as strong in industries that are open to the international economy.JEL classification: F1; L1; L6
scite is a Brooklyn-based organization that helps researchers better discover and understand research articles through Smart Citations–citations that display the context of the citation and describe whether the article provides supporting or contrasting evidence. scite is used by students and researchers from around the world and is funded in part by the National Science Foundation and the National Institute on Drug Abuse of the National Institutes of Health.