Wednesday, October 16, 2013

Administered Prices in the Eurozone: Some Empirical Data

Fabiani et al. (2006) provide empirical evidence of the extent of administered prices in Eurozone nations from a number of surveys and studies.

The data are below:
Nation | Total Percentage of Markup Prices
Belgium | 46%

Spain | 52%

Italy | 42%

Netherlands | 56%

Portugal | 65%

Euro Area | 54% (average for whole Euro Area)

(Fabiani et al. 2006: 18, Table 4).
It is very striking indeed that for the Eurozone as a whole the average is 54% – a majority of prices.

It is also very telling that the number of prices affected by government regulation or controls is far lower than the percentage of prices directly administered and made relatively inflexible by private sector businesses themselves.

This can be seen here in the category Fabiani et al. call “other” price-setting rules:
Nation | Total Percentage of “Other” Prices*
Belgium | 18%

Spain | 21%

Italy | 26%

Netherlands | 21%

Portugal | 23%

Euro Area | 18% (average for whole Euro Area)

* N.B. This category also seems to refer to other types of price setting apart from government regulation.
(Fabiani et al. 2006: 18, Table 4).
Furthermore, Fabiani et al. have a second category of prices called “competitors’ prices,” which describe prices influenced by pricing of competitors. This does refer to many types of flexprices, but may possibly conceal some administered prices too, so that the first percentages given above may be underestimates.

Unfortunately, total percentages for Germany and France are not given, but data for goods (as opposed to services) markets are:
Nation | Percentage of Markup Prices for Goods
Germany | 73%

France | 40%
(Fabiani et al. 2006: 18, Table 4).
It is striking how high the percentage of administered prices is for goods markets in Germany: it stands at 73%.

Fabiani, S., M. Druant, I. Hernando, C. Kwapil, B. Landau, C. Loupias, F. Martins, T. Mathä, R. Sabbatini, H. Stahl and A. Stokman. 2006. “What Firms’ Surveys tell us about Price-Setting Behavior in the Euro Area,” International Journal of Central Banking 2.3: 3–47.


  1. Frankly, LK, I think these stats are tending toward BS. Why? Because the more we move into the contemporary world the more idiot managers are narrativising their pricing in terms of garbage economics.

    This is what I see in finance. People act one way and they think another. They narrativise their actions in a very specific way including free markets and whatever but then they act in line with administered pricing.

    Stats on this post, say, 1990 (rough estimate), I wouldn't believe for a minute, to be honest.

    1. In this case, the survey did not impose unfamiliar economic terms on the business people surveyed, so I don't think you can make the case that they did not describe their price setting policies properly:

      "The option that the price is set as a margin applied to costs requires some clarification. First, whereas the theoretical literature
      refers to the concepts of markup and marginal costs, most businesspeople might not easily understand this terminology. In order to avoid confusion on the side of the respondents, the concept of markup has typically been translated into 'profit margin,' etc. "
      p. 16

  2. I'm interested in how administered prices affect microeconomic platitudes about efficiency. Will they cause deadweight losses? Will they shift equilibria in bogus ways?

    1. The belief that prices in market economies are flexible and shift towards market clearing values is one of the crucial arguments of both neoclassicals and Austrians in favour of the efficiency and economic coordination of laissez faire markets, and one of the ways in which an economy is supposed to converge to a general equilibrium state (in neoclassical theory).

      It follows directly that with administered prices forming somewhere between 50-70% of prices in any particular advanced economy, all the neoclassical and Austrian theory vanishes like a puff of smoke. (And once we add in prices that are inflexible for other reasons the percentages rise even higher).

      It is demand and expected demand that drive output and employment throughout the administered price markets.

      Hence a Keynesian stimulus increases production and employment directly throughout many markets, probably the majority (and not just prices).

      The role of prices is one of the keys to understanding and refuting a lot of economic theory -- including of libertarians.

      Notice how the libertarian hacks who sometimes comment on my site are reduced to incoherent rambling whenever this subject is brought up.

    2. And administered prices provide empirical evidence for why a market economy does not converge to general equilibrium states, although there are many other reasons too of course, such as

      (1) subjective and shifting expectations of economic agents
      (2) fundamental uncertainty
      (3) non neutrality of money
      (4) the zero or very small elasticity of production of money and financial assets and the zero or near zero elasticity of substitution with producible commodities of
      money and financial assets
      (5) falsity of the gross substitution axiom
      (6) problem of debt deflationary dynamics
      (7) the falsity of the idea of time preference theory of interest rates and falsity of loanable funds theory, and the consequence that interest rates do not coordinate investment and saving.

  3. I was curious about how the life cycle of an industry and the presence of entrepreneurship would affect the adoption of administered prices. Do younger industries without a category defining standard (e.g., back when Beta and VHS were still completely vigorously with each other over format) tend to favor flexible prices? And then when VHS become the standard for the industry, administered prices tend to take over?