Friday, November 29, 2013

Mark-up Pricing in Japan

Nakagawa et al. (2000) reports the results of a survey from April to May 2000 of 630 Japanese companies listed in the first section of the Tokyo Stock Exchange, including both manufacturing and non-manufacturing businesses (Nakagawa et al. 2000: 3–4).

The first interesting finding is that 60–70% of companies focus on the idea of “rate of return on capital” (Nakagawa et al. 2000: 5) as a management strategy, which also is applicable to price setting. This idea appears to be strongly related to the target rate of return version of mark-up pricing: firms attempt to create a given level of profits by calculating average costs of production, an expected volume of sales, and then a profit mark-up to achieve the planned profit level.

Around 90% of Japanese companies reported that competition had become severe by 2000 compared with the late 1990s, owing to decreased demand, increases in imports and foreign competition, and deregulation (Nakagawa et al. 2000: 6).

This is not surprising given that Japan was still in the last years of its Lost Decade in 2000 and had experienced demand shocks from the East Asian economic crisis in the later 1990s and increased international competition, especially from China.

While companies reported that price reductions, “product differentiation” (70%), and cutting costs were a response to severe competition, it appears that in manufacturing non-price measures such as product differentiation rather than price reduction were the preferred response to competitive pressures (Nakagawa et al. 2000: 8).

Unfortunately, the results of this survey are somewhat contradictory and difficult to interpret owing to the unusual way they are reported.

Around 18% of firms reported that direct cost plus fixed mark-up pricing was important in their price setting behaviour (Nakagawa et al. 2000: chart 9). Unfortunately, it is unclear whether “direct cost” means (1) total average cost or (2) variable cost, or whether the survey even bothered to ask what kind of costs were used in calculating the mark-up.

Furthermore, Nakagawa et al. did not ask businesses whether they used variable mark-up pricing, where the profit mark-up is changed more frequently – a serious shortcoming in their survey.

Although 36% of companies reported that “market condition” was important in their price setting behaviour and that prices were set at the upper limit permitted by the market with demand and supply factors being important, nevertheless Fabiani et al. (2007: 190) argue that this finding is actually compatible with a type of mark-up pricing too, presumably just a more competitive one where the mark-up is variable: that is to say, because of the competition that Japanese manufacturing companies face, they must adjust their profit mark-up to remain competitive.

If this is so, then about 54% of Japanese firms appear to have reported that mark-up pricing is an important element of price setting behaviour.

That result would be consistent with the price rigidity as reported in the survey, in which just over 50% of manufacturing companies had changed prices once or twice in the previous year and about 19% of manufacturing companies had not changed prices at all (Nakagawa et al. 2000: 10)

Other studies, though based on smaller samples, confirm the existence of mark-up pricing, and other details.

Baba (1995) finds that many Japanese manufacturing firms use mark-up pricing.

Hsu (1999) confirms this and the existence of mark-up prices in other sectors too, but sometimes of a different form than in the West (Hsu 1999: 164).

Some unusual pricing practices exist that relate to the way that Japan is an export-oriented economy. Some firms allegedly base their export mark-up prices on variable costs alone to make their prices far more competitive overseas, but raise domestic prices to a higher level that is sufficient to recoup fixed costs (Hsu 1999: 165).

BIBLIOGRAPHY
Baba, N. 1995. “On the Cause of Price Differentials between Domestic and Overseas Markets: Approach through Empirical Analyses of Markup Pricing,” Bank of Japan Monetary and Economic Studies 13.2: 45–74.

Fabiani, Silvia, Suzanne Loupias, Claire, Monteiro Martins, Fernando Manuel and Roberto Sabbatini. 2007. Pricing Decisions in the Euro Area: How Firms set Prices and Why. Oxford University Press, New York.

Hsu, Robert. 1999. “Pricing Practices in Japan,” Global Business and Economics Review 1.2: 164–171.

Nakagawa, S., R. Hattori and I. Takagawa, 2000. “Price-Setting Behaviour of Japanese Companies,” Bank of Japan Research Paper
http://www.boj.or.jp/en/research/brp/ron_2000/ron0009b.htm/

2 comments:

  1. This is about the management and institutional layer that firms use to deal with markets. Firms can go years without changing any prices or product lineups but the market always imposes its demand by eventually making some products unprofitable or making whole firms unprofitable. New firms come into the market all the time making older firms irrelevant.
    This management layer is not the market, it is a way to deal with it.

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    Replies
    1. Is this supposed to refute what I said above?

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