The Pricing Behaviour of Firms in the Euro Area: New Survey Evidence

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in Editorial DirectorJan Smets, Member of the Board of Directors of the National Bank of Belgium Statement of purpose:The purpose of these working papers is to promote the circulation of research results (Research Series) and analytical studies (Documents Series) made within the National Bank of Belgium or presented by external economists in seminars, conferences and conventions organised by the Bank. The aim is therefore to provide a platform for discussion. The opinions expressed are strictly those of the authors and do not necessarily reflect the views of the National Bank of Belgium. AbstractThis study investigates the pricing behaviour of firms in the euro area on the basis of surveys conducted by nine Eurosystem national central banks. Overall, more than 11,000 firms participated in the survey. The results are very robust across countries. Firms operate in monopolistically competitive markets, where prices are mostly set following mark-up rules and where price discrimination is a common practice. Our evidence suggests that both time-and state-dependent pricing strategies are applied by firms in the euro area: around one-third of the companies follow mainly time-dependent pricing rules while two-thirds use pricing rules with some element of statedependence. Although the majority of firms take into account a wide range of information, including past and expected economic developments, about one-third adopts a purely backward-looking behaviour. The pattern of results lends support to the recent wave of estimations of hybrid versions of the New Keynesian Phillips Curve. Price stickiness arises both at the stage when firms review their prices and again when they actually change prices. The most relevant factors underlying price rigidity are customer relationships -as expressed in the theories about explicit and implicit contracts -and thus, are mainly found at the price changing (second) stage of the price adjustment process. Finally, we provide evidence that firms adjust prices asymmetrically in response to shocks, depending on the direction of the adjustment and the source of the shock: while cost shocks have a greater impact when prices have to be raised than when they have to be reduced, reductions in demand are more likely to induce a price change than increases in demand.

Price-Setting Behaviour in Belgium: What Can Be Learned from an Ad Hoc Survey ?

“…Overall, these findings -having been converted into quantities demanded -imply an average elasticity of demand of 4.5. A similar magnitude is found by Fabiani et al (2004). An elasticity of 4.5 implies a mark-up of 1.29, compared to 1.35 for the euro area in Bayoumi et al (2004) and 1.1 in Galí et al (2001).…”

“…The content of the questionnaire was mainly inspired by Apel et al (2001), Blinder et al (1998) and Fabiani et al (2004), although some additional questions were included in order to take into account the fact that the Belgian economy is a very open one and that little is known about price-setting behaviour on foreign markets. Moreover, on designing the questionnaire, an attempt was made to incorporate the most recent developments in the relevant literature, in particular on the following two issues which are of particular interest when addressing the above-mentioned persistence puzzles stressed in Taylor (1999).…”

Price setting behaviour in the Netherlands: results of a survey

“…In 2003, price changes (and especially price decreases) were relatively rare for small firms. This confirms earlier findings by Jonker et al (2004) for CPI prices in the Netherlands and is also consistent with results in Fabiani et al (2005) for surveys in other countries participating in the IPN. …”

“…This is in line with findings in other EMU countries (see Fabiani et al (2005)). In a recent paper, Jonker et al (2004) examine the degree of nominal rigidity of consumer prices in the Dutch economy using a large database with monthly price quotes of 49 articles during 1998-2003.…”

“…The study by Jonker et al (2004) into Dutch CPI prices also finds that price increases occur more often than decreases and that on average, the magnitude of decreases is larger. Fabiani et al (2005) and Dhyne et al (2005) report similar findings. As mentioned in the introduction, our survey covers a broad range of firm sizes.…”