Mark-up Pricing in Italy

Fabiani, Gattulli and Sabbatini (2004) report the results of a survey on price setting behaviour by Italian firms (see also Fabiani, Gattulli and Sabbatini 2007).

The survey was conducted in January 2003 and involved 333 industrial and service firms (Fabiani et al. 2004: 8), although about 66% were industrial firms. Furthermore, the survey was biased towards firms selling producer goods or wholesale goods (Fabiani et al. 2004: 13).

It was found that about 60% of firms review prices once a year, and around 50% only actually change prices once a year too (Fabiani et al. 2004: 21).

Firms were asked how their unit variable costs change when there is an increase in the level of production, and the following results were obtained:

Increasing costs | 48.5%

Unchanged/flat costs | 21.3%

Decreasing costs | 27.2%

N.A. 2.5%.
(Fabiani et al. 2004: 14).

So 48.5% of firms reported flat or decreasing unit variable costs: roughly half of firms surveyed.

The firms were asked how they set the price of their main product, and the following answers were obtained:

Mark-up on unit variable costs | 63.1%

Regulated price | 13.3%

Other | 7.3%

No Answer | 16.3%.
(Fabiani et al. 2004: 16).

Mark-up pricing emerges as the overwhelmingly important type of price setting behaviour. It is also interesting here to see that regulated prices only account for only 13.3% of prices, which is far lower than the percentage for mark-up pricing.

As I have argued here, it is a mistake to think from survey data like this that firms are only using unit variable costs to calculate their mark-up price. On the contrary, when firms are pressed on this issue and we look at all the other empirical evidence, it emerges that most mark-up pricing firms are using total average unit costs (including fixed/overhead costs).

Firms were also asked to assess the importance of various theories explaining price rigidity and the theories were ranked as follows from most important to least important:

(1) Co-ordination failure

(2) Temporary shocks

(3) Explicit contracts

(4) Pricing thresholds

(5) Menu costs

(6) Bureaucratic reasons.
(Fabiani et al. 2004: 25).

These results are in line with other national surveys, but the failure to include cost-based as a theory was a major oversight.

Firms were also asked if a rise/fall in demand was an important factor in causing price changes, but some 51.1% of firms said demand changes were either unimportant (13%) or of minor importance (38.1%) in driving price changes (Fabiani et al. 2004: 26). Only 34% of firms said demand was an important factor.

Most firms reported that cost shocks were the most important factor driving price changes (Fabiani et al. 2004: 27).

Finally, price changes tend to be asymmetric: cost shocks are more likely to raise prices than reduce them (that is, firms often do not decrease prices if costs fall), and demand changes, to the extent they influence prices, tend to cause price decreases rather than price increases (that is, firms generally do not adjust prices upwards when demand increases but might reduce them if demand falls) (Fabiani et al. 2004: 34).

BIBLIOGRAPHY
Fabiani, Silvia, Gattulli, Angela, and Roberto Sabbatini. 2004. “The Pricing Behaviour of Italian Firms: New Survey Evidence on Price Stickiness,” ECB Working Paper Series No. 333
http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp333.pdf

Fabiani, Silvia, Gattulli, Angela, and Roberto Sabbatini. 2007. “The Pricing Behaviour of Italian Firms: New Survey Evidence on Price Stickiness,” 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. 110–123.