Wednesday, March 26, 2014

Mark-up Pricing in Belgium

Aucremanne and Druant (2005) report the results of a survey of price setting behaviour by Belgian firms (see also Aucremanne and Druant 2007).

The survey was conducted in 2004 by the National Bank of Belgium and involved 1,979 firms in the industrial, construction, trade and services sectors, in a sample that should represent about 60% of Belgian GDP (Aucremanne and Druant 2005: 8, 10).

Under normal conditions, 65.7% of firms used time dependent price setting (Aucremanne and Druant 2005: 25), and of these 60% reviewed prices once a year, and 20% twice a year (Aucremanne and Druant 2005: 28).

It was further found that 55% of firms actually changed prices once a year, 18% less often, and 27% more than once a year (Aucremanne and Druant 2005: 31).

In line with other surveys, it was found that the two major price setting methods were (1) prices set based on costs plus mark-up and (2) prices based on competitors’ price (with the profit margin not determined directly by the company) (Aucremanne and Druant 2005: 22). The way in which this question was asked confirms that the category “competitors’ prices” on other surveys tends to be conceal mark-up pricing.

A clear problem with these types of surveys can be seen in the fact that Aucremanne and Druant (2005) do not ask firms explicitly whether they set their mark-up over total average unit costs or marginal costs (Aucremanne and Druant 2005: 18).

Nevertheless, the firms were also asked to score the importance of theories explaining price stickiness in the following way:
1 = unimportant
2 = of minor importance
3 = important
4 = very important. (Aucremanne and Druant 2005: 18).
The top 5 theories were as follows:
(1) Implicit contracts
(2) Explicit contracts
(3) Sluggish costs / constant marginal costs
(4) Importance of fixed costs / liquidity constraints
(5) Kinked demand curve / coordination failure (Aucremanne and Druant 2005: 34).
The results of this question, however, are clearly flawed by the failure to even include “mark-up pricing” as a theory, despite the survey finding that this was important in price setting.

But the result that many firms report relatively flat variable cost curves over the business cycle is important (Aucremanne and Druant 2005: 35), and confirmed by other surveys.

Aucremanne, Luc and Martine Druant. 2005. “Price-Setting Behaviour in Belgium. What can be learned from an ad hoc Survey?,” ECB Working Paper Series No. 448

Aucremanne, Luc and Martine Druant. 2007. “Why Are Prices Sticky?: Evidence from an Ad Hoc Survey in Belgium,” 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. 69–82.

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