Mark-up Pricing in Spain

Álvarez and Hernando (2005) report the results of a survey on price setting behaviour of firms in Spain (see also Álvarez and Hernando 2007).

The research was conducted by a private company between May and September 2004 using a questionnaire prepared by the Banco de España, and involved 2,008 firms from the manufacturing, energy, trade, hotel and restaurant, transport and communications sectors (Álvarez and Hernando 2005: 8). These sectors represent about 51.3% of Spanish Gross Value Added (GVA) (Álvarez and Hernando 2005: 8).

The median firm changes the price of its main product once a year (Álvarez and Hernando 2005: 20).

The firms were asked to assess the importance of nine theories explaining price rigidity and rank these theories with a score from (1) (unimportant) to (4) (very important).

The theories were ranked in the following order from most important to least important:

(1) Implicit contracts

(2) Coordination failure

(3) Explicit contracts

(4) Temporary shocks

(5) Quality signal

(6) Pricing points

(7) Menu costs

(8) Change non-price factors

(9) Information costs.

These results are in line with other surveys.

While the survey fails to ask firms whether they use mark-up pricing, nevertheless the results strongly suggest that this form of price setting is important: for example, the survey results indicate that changes in costs of production are the main cause of price increases (Álvarez and Hernando 2005: 36).

Fabiani et al. (2006: 18, Table 4) report that the percentage of Spanish firms using mark-up pricing is 52%, but it is unclear where this data comes from.

BIBLIOGRAPHY
Álvarez, Luis J. and Ignacio Hernando. 2005. “The Price Setting Behaviour of Spanish Firms Evidence from Survey Data,” ECB Working Paper Series No. 538 (October)

Álvarez, Luis J. and Ignacio Hernando. 2007. “Pricing Behavior of Spanish Firms,” 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. 165–181.

Fabiani, S., M. Druant, I. Hernando, C. Kwapil, B. Landau, C. Loupias, F. Martins, T. Mathä, R. Sabbatini, H. Stahl and A. Stokman. 2006. “What Firms’ Surveys tell us about Price-Setting Behavior in the Euro Area,” International Journal of Central Banking 2.3: 3–47.

Mark-up Pricing in Portugal

Martins (2005) reports the results of a survey on price setting behaviour of firms in Portugal (see also Martins 2007).

The research was conducted between May and September 2004 by the Banco de Portugal and involved 1370 Portuguese firms, mainly from manufacturing (Martins 2005: 6).

The survey found that 75% of firms generally changed their prices but once a year (Martins 2005: 24).

Price setting behaviour is influenced by the fact that many firms have long-term relationships with their customers: the survey found 83% of firms had such long-term relationships and these accounted for 75% of sales (Martins 2005: 13). This datum is clearly related to why both explicit and “implicit” contracts are an important source of price rigidity.

Firms were also given 12 theories to explain price stickiness and asked to indicate how important each theory was in a scale ranging from 1 (“unimportant”) to 4 (“very important”).

The theories were ranked in the following order from most important to least important:

(1) Implicit contracts

(2) Co-ordination failure

(3) High fixed costs

(4) Constant marginal costs

(5) Explicit contracts

(6) Procyclical elasticity of demand

(7) Temporary shock

(8) Time lags in price adjustments

(9) Judging quality by price

(10) Menu costs

(11) Pricing thresholds

(12) Costly information.

An interesting insight concerns procyclical elasticity of demand theory:

“… if firms’ elasticity of demand is procyclical (i.e. their mark-up is countercyclical) their demand curve becomes less elastic as it shifts down, which means that when demand decreases firms lose firstly their ‘less loyal’ customers and retain those that are less sensitive to price, implying that the price can be kept basically unchanged.” (Martins 2005: 32).

Unfortunately, the serious oversight of this survey was its failure to ask firms directly whether they use mark-up pricing.

Fabiani et al. (2006: 18, Table 4) use the data from the survey and estimate that the number of firms using mark-up pricing is about 65%, which is quite high.

BIBLIOGRAPHY
Fabiani, S., M. Druant, I. Hernando, C. Kwapil, B. Landau, C. Loupias, F. Martins, T. Mathä, R. Sabbatini, H. Stahl and A. Stokman. 2006. “What Firms’ Surveys tell us about Price-Setting Behavior in the Euro Area,” International Journal of Central Banking 2.3: 3–47.

Martins, Fernando. 2005. The Price Setting Behaviour of Portuguese Firms Evidence from Survey Data,” ECB Working Paper Series No 562 (December)
https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp562.pdf

Martins, Fernando. 2007. “How Portuguese Firms set their Prices,” 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. 152–164.