Friday, November 22, 2013

Mark-up Pricing in Ireland

Keeney, Lawless and Murphy (2010) provide empirical evidence on the price setting behaviour of one thousand Irish firms in a survey in which firms were directly asked how they set prices (Keeney, Lawless and Murphy 2010: 3).

The result was that 44% of firms reported that their prices were set based on costs and a self-determined profit margin (Keeney, Lawless and Murphy 2010: 3).

Although this was the largest and most prevalent category of price setting reported in their data and is certainly significant, nevertheless it looks rather low compared to other nations.

But an examination of the other findings strongly suggests that Keeney, Lawless and Murphy’s other categories conceal mark-up prices too:
(1) No autonomous price setting* | 11.1%
(2) Price set by customer(s) | 5.5%
(3) Price set following main competitors | 33.3%
(4) Price based on costs and self-determined profit margin | 44.2%
(5) Other | 5.9%

* Because “the price is regulated, or it is set by a parent company/group” (Keeney, Lawless and Murphy 2010: 6).
Category (1) would appear to be a strong candidate for some extra mark-up pricing firms whose price is set by their parent company (in addition to regulated price companies which are also present there), and even category (3) is not inconsistent with some more mark-up firms whose administered price is based on price leaders in their respective markets who set the price. Although (3) no doubt also has a number of flexprice firms too, the point remains that some of the firms there could really belong to category (4).

This seems to be confirmed later in the data when firms were asked to assess how likely it was that they would adjust prices downwards in response to a negative demand shock.

What was discovered is that a majority of firms said that negative demand shocks were of little or no relevance to pricing decisions! The data can be seen here:
(1) Manufacturing | 69.1%
(2) Construction | 77.6%
(3) Distribution | 58.6%
(4) Other Services | 69.1%
(5) Total | 66.5%
(Keeney, Lawless and Murphy 2010: 6).
It seems incredible that so many firms could report this if only 44.2% were using mark-up pricing, since mark-up pricing firms are precisely the ones for whom demand is relatively unimportant.

More likely, the number of Irish mark-up firms is much higher than the direct number reported, and, as argued above, categories (1) and category (3) conceal a number of additional mark-up firms.

I think this is consistent with similar conclusions that can be made about UK price setting data.

Keeney, Mary, Lawless, Martina, and Alan Murphy. 2010. “How Do Firms Set Prices? Survey Evidence from Ireland,” Central Bank of Ireland, Research Technical Papers, no 7/RT/10.

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