Monday, March 24, 2014

Mark-up Pricing in Austria

Kwapil, Baumgartner and Scharler (2005) report the results of a survey of price setting behaviour by Austrian firms (with a summary in Kwapil, Baumgartner and Scharler 2007).

The survey was conducted in January 2004 by the Austrian Institute of Economic Research (WIFO) and 873 firms participated, which were mainly in the manufacturing and manufacturing-related services sectors, and often producing intermediate goods (Kwapil, Baumgartner and Scharler 2005: 9–11). Of these firms, 715 had direct control over their price setting policy (rather than a parent company), so that Kwapil et al.’s analysis was restricted to these firms (Kwapil, Baumgartner and Scharler 2005: 11). The firms were asked about price setting involving their main product or service.

Around 68% of the firms generally used time-dependent pricing, and carried out price reviews at regular time intervals (Kwapil, Baumgartner and Scharler 2005: 14).

Furthermore, the percentages for firms reporting a specific time interval in time-dependent pricing are as follows:
Yearly reviews | 25.5%
Half-yearly reviews | 17.5%
Quarterly reviews | 28.4%
(Kwapil, Baumgartner and Scharler 2005: 16).
The firms were also asked how often they changed prices on average in a given year. The results were as follows:
No change | 22.1%
Once a year | 54.2%
2 to 3 times a year | 13.9%
(Kwapil, Baumgartner and Scharler 2005: 18).
The main finding, then, is that the median firm in the survey reviewed its prices quarterly but only adjusted its prices once a year.

Firms were also asked to rank 11 different theories of why prices are generally inflexible by assigning each theory a score from 4 (strong agreement as important) to 1 (disagreement that it was important).

The top 5 theories were as follows:
Theory | Mean Score
(1) Implicit contracts | 3.04
(2) Explicit contracts | 3.02
(3) Cost-based pricing | 2.72
(4) Kinked demand curve | 2.69
(5) Coordination failure | 2.47
(Kwapil, Baumgartner and Scharler 2005: 26).
Cost-based pricing came out at number 3, and clearly scored highly.

The importance of cost-based pricing was confirmed in another question about what were the main factors in driving prices upwards. It was found that 83% of firms said wage costs and 70% said costs of intermediate goods were the most important factors causing price increases, but changes in demand scored only about 25% (Kwapil, Baumgartner and Scharler 2005: 29–30).

The most important factors driving price decreases were changes in competitors’ prices (57%), productivity improvement (44%), and prices of intermediate goods (41%), but changes in demand scored only about 30% (Kwapil, Baumgartner and Scharler 2005: 29–30).

Cost-based pricing appears to have the consequence that prices are more flexible upwards than downwards when cost shocks occur (Kwapil, Baumgartner and Scharler 2005: 34).

It was further found that 63% of firms would leave their prices unchanged in response to a large positive demand shock, and 52% would leave prices unchanged in response to a large negative demand shock (Kwapil, Baumgartner and Scharler 2005: 33). In the face of small demand shocks (either positive or negative), 82% of firms simply leave prices unchanged (Kwapil, Baumgartner and Scharler 2005: 33).

Kwapil, Baumgartner and Scharler (2007: 63) also reports that 60 to 80% of firms reported that they react to demand shocks (whether perceived to be temporary or permanent) by simply adjusting investment and the level of factor inputs, not prices. This is strong confirmation of the Keynesian view that most firms react to demand changes by directly altering employment and production levels.

Kwapil, Claudia, Baumgartner, Josef and Johann Scharler. 2005. “Price-Setting Behavior of Austrian Firms,” ECB Working Paper Series no. 464

Kwapil, Claudia, Baumgartner, Josef and Johann Scharler. 2007. “Price Reactions to Demand and Cost Shocks: Survey Evidence from Austrian 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. 55–68.

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