Mark-up Pricing in Germany

Stahl (2005) reports the results of a survey on price setting behaviour by German manufacturing firms (see also Stahl 2007).

The survey was conducted in 2004 by the Ifo Institute for the Deutsche Bundesbank (Germany’s central bank) and involved 1200 manufacturing firms (Stahl 2005: 9–10).

The firms were asked how prices are determined. The results were as follows:

Constant mark-up on calculated unit costs | 4%
Taking calculated unit costs as a reference and varying the mark-up | 69%
Taking the price of the main competitor as a reference | 17%
Tying the price to another price | 2%
Other | 7%
(Stahl 2005: 10).

Mark-up pricing accounts for 73% of price setting – a very high percentage. Stahl (2005) argues that those firms that set a constant mark-up on unit costs are the mark-up price leaders: the most powerful firms that determined the price in a given market (Stahl 2005: 11). By contrast, time-varying mark-up pricing is used by firms which follow price leaders and must pay more attention to market conditions and competition (Stahl 2005: 11).

Even in the case of the third category (“taking the price of the main competitor as a reference”), it may be the case that these are “price followers” and although less powerful than other mark-up price setters, some of them may also be using mark-up pricing.

When asked what theories best explain price stickiness, the following results were obtained from the most important to least important:

(1) Nominal fixed-term contract
(2) Coordination failure
(3) Price elasticity of demand
(4) Regular date
(5) Regular time interval
(6) Transitory shock
(7) Sluggish costs
(8) Menu costs
(9) Other
(Stahl 2005: 13).

The failure to include cost-based pricing as a theory in this list is a serious oversight, but the results are in line with other surveys: both (1) explicit (and implicit) contracts and (2) coordination failure (the fear that if prices were raised, competitors will not follow suit, and if prices were reduced, then this would set off a destabilising price war) are fundamental factors that restrain prices.

In questions asking about what causes price changes, the following result strongly confirms the important of cost-based pricing:

“It turned out that the most important motivation for price changes is changes in the costs of materials … . Their impact is larger for price rises than for price reductions.” (Stahl 2005: 14).

This also means that prices are more flexible upwards than downwards, and confirms that there is a bias towards upwards movements (rather than downwards movements) in mark-up pricing changes.

BIBLIOGRAPHY
Stahl, Harald. 2005. “Price Setting in German Manufacturing: New Evidence from New Survey Data,” ECB Working Paper Series No. 561
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=868433

Stahl, Harald. 2007. “Price Setting in German Manufacturing: Evidence from New Survey Data,” in S. Fabiani, C. Suzanne Loupias, F. M. Monteiro Martins and Roberto Sabbatini (eds.), Pricing Decisions in the Euro Area: How Firms set Prices and Why. Oxford University Press, New York. 97–109.