Saturday, November 23, 2013

Mark-up Pricing in Norway

I summarise the findings of Langbraaten et al. (2008), a survey conducted in the period from February to May 2007 by the Norges Bank, the central bank of Norway (Langbraaten et al. 2008: 26). This involved a well-sampled survey of 725 firms throughout many sectors of the Norwegian economy, including manufacturing, wholesale and retail trade, services, tourism, transport and banking (Langbraaten et al. 2008: 14).

As an aside, this study confirms the basic neoclassical economic theory that runs through central banks: the authors assume that money is only non-neutral in the short run, and in the long run that money is neutral (Langbraaten et al. 2008: 13). This view is of course wrong, but I digress.

The survey asked firms to indicate to what extent they set prices as a mark-up over costs from a scale of 1 (very limited extent) to 4 (very large extent). The results can be seen below:
To what extent are prices set as a mark-up over costs?
(1) Very limited extent: 13%

(2) Fairly limited extent: 18%

(3) Fairly large extent: 32%

(4) Very large extent: 37%.
The conclusion of this survey, then, is that about 69% of Norwegian businesses and firms set their prices as administered prices to a significant degree.

That figure is remarkably high: an overwhelming majority of firms.

What is especially interesting in this survey is that it strongly confirms my conclusions in this post about Ireland and in this post about the UK: the direct reported number of mark-up firms in surveys from these nations are very likely to be underestimates, because many mark-up firms have chosen to report their price setting behaviour as one “dependent on” or “following” their main competitors.

This makes sense because many smaller or medium sized mark-up pricing firms in many competitive markets simply follow a mark-up pricing “leader” firm that sets the price for the whole market.

Langbraaten et al. report the following the important insight:
“ … the prices charged by firms in the survey are determined to an even greater extent by the prices of their competitors. Almost four out of five firms indicated that their price depends on competitors’ prices to a “fairly great extent” or a “very great extent” (see Chart 6). ...

Questions about whether firms set prices as a mark-up over costs and whether prices depend on competitors’ prices have also been asked in many of the national surveys in the euro area. Generally speaking, more firms there responded that prices are set as a mark-up over costs than that prices depend on competitors’ prices. Although prices can be set as a mark-up over costs and still depend on competitors’ prices, the differences between the results from Norway and the euro area may nevertheless be interpreted as an indication that there is generally stronger competition between firms in the Norwegian market.” (Langbraaten et al. 2008: 16).
That is, a firm can be both a mark-up pricing firm and one dependent on competitors’ prices. This is an important datum for evaluating the results of other price setting surveys.

Yet another finding was that when asked
“to what extent they take account of different types of information when setting prices. We gave them three options and, as in the previous question, asked them to assign a score to each of these options. The three options were:

• Information about present and past developments in relevant factors (inflation, demand, costs, competitors’ prices, etc.)

• Information about future developments/forecasts in these factors

• The firm uses a rule-of-thumb (such as indexation based on the consumer price index/wage growth). (Langbraaten et al. 2008: 16)
The result was that 70% of firms chose factor (1) as the most important one.

The rigidity of most prices was also made clear by the finding that nearly 50% of firms said that they only changed their product price once a year, and about 23% of firms said that they changed the price twice a year (Langbraaten et al. 2008: 18).

This survey also confirms the findings of other studies that the New Keynesian idea of “menu costs” as a major reason for price stickiness is largely rejected by firms: about 54% said “menu costs” were not important at all and about 40% said they were only slightly important (Langbraaten et al. 2008: 22). The idea that “administrative costs” – or “costly information” problems – is a major source of price stickiness is also discredited by the survey (Langbraaten et al. 2008: 22). These data can only be understood as a stunning blow to New Keynesian theory.

Langbraaten, Nina, Nordbø, Einar W. and Fredrik Wulfsberg. 2008. “Price-setting Behaviour of Norwegian Firms – Results of a Survey,” Norges Bank Economic Bulletin 79.2: 13–34.

No comments:

Post a Comment