Abstract
This paper explores nominal rigidities by investigating price-setting behavior of Austrian firms based on survey evidence. Distinguishing between two stages of price setting—first the price reviewing phase and second the price changing phase—our results suggest that the main obstacles to price flexibility lie on the second stage. Our main result is that firms postpone price adjustments, because they are afraid to antagonize customers with frequent price changes. Thus, customer relationships - especially those with consumers—are a major source of price stickiness in the Austrian economy.
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Notes
For similar studies focusing on other countries see Amirault et al. (2004) for Canada, Apel et al. (2005) for Sweden, Aucremanne and Druant (2005) for Belgium, Fabiani et al. (2004) for Italy, Hall et al. (1997) for the U.K., Hoeberichts and Stokman (2005) for the Netherlands, Loupias and Ricart (2004) for France, Luennemann and Mathae (2006) for Luxembourg, Martins (2005) for Portugal, Nakagawa et al. (2000) for Japan and Stahl (2005) as well as Wied-Nebbeling (1985) for Germany.
A detailed description of the survey is provided in Kwapil et al. (2005).
The Austrian market is regarded as their main market, if they earn more than 60% of their turnover there.
The alternative answers were that the parent company, the main client or a regulatory authority determine prices.
The remaining 30% review their prices on specific occasions, e.g. when costs change considerably.
Kashyap (1995) rejects this hypothesis. He observes differing reviewing behavior also with regard to products having similar cost and demand characteristics. However, if products are alike, then the arrival of the necessary information should be correlated as well.
The results shown in Table 2 refer to a sample of firms that answered the question on price reviews as well as the question on price changes.
For a detailed description of these theories see Blinder et al. (1998).
We asked the same question in relation to price decreases. However, as the results are very similar in both cases, we just report the results on price increases.
There is just one exception, namely menu cost would rank sixth under this criterion and information cost would rank seventh.
As a robustness check, we estimate the model a second time including the market share as a proxy for the firms’ market structure. However, this does not change the results qualitatively.
As already mentioned above, we asked the question of which theory comes close to the actual way of price setting twice. Once in relation to price increases and once in relation to price decreases. However, the concept of implicit contracts was formulated in only one question, as it refers to price increases and decreases at the same time. Consequently, Table 5 does not distinguish between upward and downward price adjustments.
Moreover, we observe that firms with a high share of consumers are less likely to have explicit contracts. Here we observe a negative relationship which is significant only at the 10% level. Taking a closer look at our sample, we find that firms with a high share of consumers mainly sell durable consumer goods and services, which are not purchased on a regular basis (e.g. carpenter). Therefore, explicit contracts would need to promise constant prices for very long periods and might thus, not be a viable option.
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The views expressed in this paper are those of the authors and do not necessarily represent the position of the Oesterreichische Nationalbank. We are grateful to the participants of the Inflation Persistence Network of the Eurosystem as well as to the participants of the OeNB’s Workshop on ‘Price Setting and Inflation Persistence in Austria’ for their useful comments and suggestions. All remaining errors and shortcomings are the responsibility of the authors alone.
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Kwapil, C., Scharler, J. & Baumgartner, J. Price-setting behavior of Austrian firms. Empirica 34, 491–505 (2007). https://doi.org/10.1007/s10663-007-9046-z
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DOI: https://doi.org/10.1007/s10663-007-9046-z