Saturday, November 30, 2013

Mark-up Pricing in New Zealand

Miles Parker, in the paper cited below, examines price setting behaviour in New Zealand, and reports on the results of a survey of 5,300 firms selected as a representative sample of all sectors of the New Zealand economy (Parker, pp. 1–2).

The results are as follows:
Price Setting methods (averages)
(1) Costs plus profit mark-up | 54%

(2) Influence of competitors’ prices | 29%

(3) Rule of thumb | 10%

(4) Other | 8%.
(Parker, pp. 14).
Evidence suggests that the “rule of thumb” category involves mark-up pricing too (as in regulated health and education sectors), as does the category “other,” so that, as in other studies, the total percentage of mark-up prices is likely to be higher than the reported figure of 54%.

Parker notes that many other studies show that firms struggle to even determine what their marginal costs are (Parker, pp. 13). But it seems that the survey did not bother to inquire whether it was total average unit costs that were the normal method of cost calculation used in setting mark-up prices, an obvious shortcoming.

The average firm reviews prices twice a year but changes its prices only once a year (Parker, pp. 28).

An interesting insight is that sales, clearance sales and even temporary price reductions seem to be considerably less important than most people think.

When asked whether temporary price reductions were important, the following results were found:
(1) not at all | 44%

(2) a little important | 17%

(3) moderately important | 16%

(4) very important | 13%.

(5) don’t know | 10%
(Parker, pp. 17).
From this, it follows that 61% of firms regard temporary price reductions as either marginally important or mostly not important at all to their price setting policies: a finding that is entirely consistent with the view that modern economies have relatively rigid mark-up prices which are relatively inflexible downwards.

Another finding is that price rigidity is quite important in markets for intermediate goods and wholesale markets (Parker, pp. 6–7).

Parker, Miles. “Price-Setting Behaviour in New Zealand”,Miles.pdf

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