Tuesday, January 7, 2014

Mark-up Pricing in Canada

Amirault, Kwan, and Wilkinson (2004) examine price setting in Canada, and report the results of a survey of 170 private, unregulated, non-primary sector firms in the sectors of construction (10%), manufacturing (26%), trade (14%), and services (49%), in a sample which should give representative results for about 70% of Canada’s output in 2002 (Amirault, Kwan, and Wilkinson 2004: 3–4).

The firms were questioned about the pricing of their main product or broad product category (Amirault, Kwan, and Wilkinson 2004: 6).

Although the survey found that Canadian prices were somewhat more flexible than in other nations, nevertheless relative price inflexibility is significant. The survey found that 43% of firms had changed their prices from 0 to 2 times in the previous year (Amirault, Kwan, and Wilkinson 2004: 9). Some 15% of firms had changed prices 3 to 4 times in the past year (Amirault, Kwan, and Wilkinson 2004: 9).

Most interesting was this finding:
“At the extreme end, 6 per cent reported changing prices more than 365 times in the past year. This suggests that the classical paradigm of continuously market-clearing auction markets (continuous costless repricing) applies to only a very small portion of Canadian product markets. This high price flexibility is largely the result of many of these firms changing prices on a customer-by-customer basis.” (Amirault, Kwan, and Wilkinson 2004: 10).
The survey also found that around 66% of Canadian firms review their prices in a time-dependent manner, that is, they only review prices after a particular fixed period of time (e.g., quarterly or annually) (Amirault, Kwan, and Wilkinson 2004: 12).

An impressive 67.1% of firms surveyed attributed price inflexibility to “cost-based pricing” – that is, to mark-up pricing (Amirault, Kwan, and Wilkinson 2004: 21).

As Amirault et al. report,
“Among the ten theories tested, cost-based pricing is the most widely recognized theory proposed to our sample of Canadian firms—two of every three firms recognized this concept.” (Amirault, Kwan, and Wilkinson 2004: 21).
In contrast to this, the New Keynesian theory of “menu costs” as a fundamental cause of price stickiness was “one of the least recognized theories” by firms (Amirault, Kwan, and Wilkinson 2004: 31).

Even more damning for New Keynesians was the finding that the “sticky information” theory of Mankiw and Ries had the “lowest acceptance rate” of any theory (Amirault, Kwan, and Wilkinson 2004: 33).

BIBLIOGRAPHY
Amirault, D., Kwan, C. and G. Wilkinson. 2004. “A Survey of the Price-Setting Behaviour of Canadian Companies,” Bank of Canada Review 2004/2005: 29–40.
http://www.bankofcanada.ca/2006/09/publications/research/working-paper-2006-35/

5 comments:

  1. And water is wet. You act like this implies supply and demand have nothing to do with prices.

    If I'm a firm introducing a new product to market. Maybe it's just easier for me to add 10% to costs rather than doing elaborate market research to figure out the right price.

    But after the product is in the market, if the "mark up" price was too low it will blow through its inventor, if it's too high inventory will pile up.

    It's absurd to suggest that businesses will dogmatically cling to a mark up price in the face of a shortage or surplus.

    Are they going to adjust prices on an hourly basis? No. But are they going to adjust once they are confident they have enough data from their current prices to suggest they arent maximizing profit? Of course.

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    Replies
    1. (1) "You act like this implies supply and demand have nothing to do with prices."

      I do no such thing, and this statement shows your sheer ignorance of this subject.

      Since mark-up prices are based on costs of production as measured in total average unit costs, of course they are related to supply.

      But once established in a market with various mark-up price businesses, they are not *generally* adjusted in response to demand changes, and instead output and employment levels will be adjusted to demand, not price.

      This entails that such mark-up prices are not market clearing prices in sense of neoclassical and Austrian economics.

      (2) "It's absurd to suggest that businesses will dogmatically cling to a mark up price in the face of a shortage or surplus."

      You have no idea how the average firm works. The existence and holding of inventories is a very prevalent practice. If inventories pile up as demand falls, production will be cut.

      If inventories fall as demand rises, production will be ramped up.



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    2. It's absurd to suggest that businesses will dogmatically cling to a mark up price in the face of a shortage or surplus.

      First, that assumes that businesses normally carry no inventories (which is wrong), but for those who want to see why "Chris P" has no idea what he is talking about, let us look at some empirical evidence.

      This is what is revealed by empirical reality: in the survey of 654 UK businesses, they were asked: what do you do when there is a boom in demand which cannot be met from stocks or inventories?

      Most UK firms said they simply increase overtime of workers (as reported by 62% of firms), hire more workers (12%), or increase capacity (8%) to produce more output, rather than increase the price of their product.

      Only 12% said they would increase the price of their product (Hall, S., Walsh, M. and A. Yates. 2000. “Are UK Companies’
      Prices Sticky?,” Oxford Economic Papers 52.3: 425–446, at p. 442).

      But "Chris P" -- in the depths of his contemptible ignorance of the real world -- says that it is "absurd to suggest that businesses will dogmatically cling to a mark up price in the face of a shortage or surplus".

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    3. You can sort of tell that the people that say that sort of thing have never worked at the sharp end in a business.

      If you do then it disabuses you of a load of economic religion in a very short amount of time.

      Of course then you'll get the appeal to aggregation as the trump card.

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  2. "You can sort of tell that the people that say that sort of thing have never worked at the sharp end in a business."

    Meanwhile my job is to literally price stuff for a corporation.

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