Tuesday, May 6, 2014

Mark-up Pricing in Portugal

Martins (2005) reports the results of a survey on price setting behaviour of firms in Portugal (see also Martins 2007).

The research was conducted between May and September 2004 by the Banco de Portugal and involved 1370 Portuguese firms, mainly from manufacturing (Martins 2005: 6).

The survey found that 75% of firms generally changed their prices but once a year (Martins 2005: 24).

Price setting behaviour is influenced by the fact that many firms have long-term relationships with their customers: the survey found 83% of firms had such long-term relationships and these accounted for 75% of sales (Martins 2005: 13). This datum is clearly related to why both explicit and “implicit” contracts are an important source of price rigidity.

Firms were also given 12 theories to explain price stickiness and asked to indicate how important each theory was in a scale ranging from 1 (“unimportant”) to 4 (“very important”).

The theories were ranked in the following order from most important to least important:
(1) Implicit contracts

(2) Co-ordination failure

(3) High fixed costs

(4) Constant marginal costs

(5) Explicit contracts

(6) Procyclical elasticity of demand

(7) Temporary shock

(8) Time lags in price adjustments

(9) Judging quality by price

(10) Menu costs

(11) Pricing thresholds

(12) Costly information.
An interesting insight concerns procyclical elasticity of demand theory:
“… if firms’ elasticity of demand is procyclical (i.e. their mark-up is countercyclical) their demand curve becomes less elastic as it shifts down, which means that when demand decreases firms lose firstly their ‘less loyal’ customers and retain those that are less sensitive to price, implying that the price can be kept basically unchanged.” (Martins 2005: 32).
Unfortunately, the serious oversight of this survey was its failure to ask firms directly whether they use mark-up pricing.

Fabiani et al. (2006: 18, Table 4) use the data from the survey and estimate that the number of firms using mark-up pricing is about 65%, which is quite high.

Fabiani, S., M. Druant, I. Hernando, C. Kwapil, B. Landau, C. Loupias, F. Martins, T. Mathä, R. Sabbatini, H. Stahl and A. Stokman. 2006. “What Firms’ Surveys tell us about Price-Setting Behavior in the Euro Area,” International Journal of Central Banking 2.3: 3–47.

Martins, Fernando. 2005. The Price Setting Behaviour of Portuguese Firms Evidence from Survey Data,” ECB Working Paper Series No 562 (December)

Martins, Fernando. 2007. “How Portuguese Firms set their Prices,” 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. 152–164.

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