Friday, March 28, 2014

Mark-up Pricing in France

Loupias and Ricart (2004) report the results of a survey on price setting behaviour by French firms (see also Loupias and Ricart 2007).

The survey was conducted during the winter of 2003–2004 by the Banque de France and involved 1,662 manufacturing firms (Loupias and Ricart 2004: 8).

In line with other surveys, it was found that it is difficult to question firms about their marginal costs (since the concept is hard to explain to business people!) and marginal cost is itself difficult to calculate (Loupias and Ricart 2004: 11).

As a substitute for marginal cost, the survey instead asked firms about their unit variable costs, and 36% of firms reported that their unit variable costs are constant (Loupias and Ricart 2004: 11).

Firms were asked how many times they changed the prices of their main product in 2003, and the following results were found:
No change | 21.1%
Once | 46.3%
Twice | 19.9%
3 to 6 times | 7.7%
7 to 12 times | 2.1%
(Loupias and Ricart 2004: 48, Table 5.1.2).
Most firms, then, only changed their product price once in the previous year, and a significant 21.1% not at all, which indicates a high level of relative price rigidity.

Furthermore, prices are more likely to rise than fall: price increases accounted for around 70% of price changes in 2004 (Loupias and Ricart 2004: 25). This is explained by a clear price asymmetry: prices are more rigid downward than upward when cost shocks occur, but when demand shocks occur more rigid upward than downward (Loupias and Ricart 2004: 26, 28–29). That is to say, many firms, when their costs decline, merely prefer to leave prices unchanged (Loupias and Ricart 2004: 27) and enjoy a higher profit mark-up, rather than cut prices.

The firms were asked how they set the price for their main product. The results were as follows:
Mark-up on unit variable costs (with prices different from competitors) | 36.9%
Competitors’ prices | 35.1%
Regulated price | 4%
Other | 17.1%
(Loupias and Ricart 2004: 45, Table 4.1).
Though mark-up pricing is reported only at 36.9% (which is lower than findings from other national surveys), it seems clear that the “competitors’ prices” category also conceals other mark-up prices too, as mark-up pricing firms which follow “price leaders” often tend to report their pricing strategy in this category (as the evidence from Ireland and Norway suggests).

When asked to rank the importance of ten theories explaining why prices change and do not change, by scoring them from 1 (unimportant) to 4 (very important), the following results were obtained with theories ranked from the most important to least important:
(1) Cost-based pricing
(2) Coordination failure
(3) Nominal contracts
(4) Implicit contracts
(5) Temporary shocks
(6) Demand shock
(7) Number of competitors
(8) Pricing points
(9) Stock/delivery
(10) Physical menu costs
(Loupias and Ricart 2004: 47, Table 6.1).
Cost-based pricing was chosen as the clear winner in this survey.

Although there is evidence that considerably more French firms respond to demand shocks than in other countries (Loupias and Ricart 2004: 27), nevertheless one can note the “demand shock” was not very high on the list.

Loupias, Claire and Roland Ricart. 2004. “Price Setting in France: New evidence from Survey Data,” ECB Working Paper Series No. 423

Loupias, Claire and Roland Ricart. 2007. “Asymmetries in Price Setting: Some Evidence from French Survey Data,” 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. 83–96.

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