Mark-up Pricing in 20 Nations and the Eurozone: the Empirical Evidence

There is a mountain of empirical evidence that shows that administered prices are the majority of prices in most modern market economies. These prices are also called “mark-up prices,” “average cost prices,” “full cost prices,” “normal cost prices,” or “cost-plus prices.”

This post describes what administered prices/mark-up prices are, and the empirical evidence for them from 20 nations and the Eurozone.

Mark-up prices are set by businesses through their cost accounting conventions in an ex ante manner before transactions take place, on the basis of (1) total average unit costs plus (2) a profit mark-up, at a given, estimated, projected or target quantity of output or level of sales (from which of course the ex post or actual quantity of output produced or sold in a given time period might differ).

Empirical evidence shows us that mark-up prices are generally inflexible with respect to demand, but tend to change – though it is by no means a necessary or universal process – when total average unit costs change or when the business wants to change its profit mark-up.

The early empirical work and theory development on administered prices/mark-up prices was done by Gardiner C. Means (1935, 1936, 1939–1940, 1962, 1992 [1933], and 1972, which are discussed here and here), Hall and Hitch (1939) (discussed here and here), P. W. S. Andrews (1949, 1949a, 1964), Kalecki (1954, 1971), A. D. H. Kaplan (Kaplan et el. 1958), and others.

But much more empirical evidence has been done over the past 50 years too (much of it listed here or in Appendix 1 below, including literature from the related “marginalist” controversy), and especially by central bank surveys on price setting over the past 10 years that were inspired by Blinder’s influential direct surveys on US business price setting (Blinder 1998).

The standard Post Keynesian works on mark-up pricing are Lee (1998) and Downward (1999).

The most recent empirical evidence on mark-up pricing in many nations can be seen below, with longer analysis given in separate posts I link to at the end of each “literature” section:

(1) The United States

Literature:
Kaplan, A. D. H., Dirlam, J. B. and Lanzillotti, R. F. 1958. Pricing in Big Business: A Case Approach. The Brookings Institution, Washington DC.

Lanzillotti, R. F. 1964. Pricing Production and the Marketing Policies of Small Manufacturers. Washington State University Press, Pullman, Washington.

Gordon, L. A., Cooper, R., Falk, H., and D. Miller. 1981. The Pricing Decision. National Association of Accountants, New York.

Govindarajan, V. and R. Anthony. 1986. “How Firms use Cost Data in Price Decisions,” Management Accounting 65: 30–34.

Shim, Eunsup, and Ephraim Sudit. 1995. “How Manufacturers Price Products,” Management Accounting 76.8: 37–39.

Blinder, A. S. et al. (eds.). 1998. Asking about Prices: A New Approach to Understanding Price Stickiness. Russell Sage Foundation, New York.

Downward, Paul and Frederic Lee. 2001. “Post Keynesian Pricing Theory ‘Reconfirmed’? A Critical Review of Asking about Prices,” Journal of Post Keynesian Economics 23.3: 465–483.

“Two Marketing Studies on US Administered Prices,” November 16, 2013.

Govindarajan and Anthony (1986) and Shim and Sudit (1995) are two marketing surveys that found that from the 1980s to the 1990s mark-up pricing accounted for roughly 70% to 85% of US industrial prices.

In a much broader and more representative survey for the US economy as a whole, Blinder et al. (1998: 200–201) found that 56.8% of the firms they surveyed said that the idea that prices and price changes depend mainly on costs of production ranked as “very important” (38.8%) or moderately important (18%).

(2) Canada

Literature:
Amirault, D., Kwan, C. and G. Wilkinson. 2004. “A Survey of the Price-Setting Behaviour of Canadian Companies,” Bank of Canada Review 2004/2005: 29–40.
http://www.bankofcanada.ca/2006/09/publications/research/working-paper-2006-35/

“Mark-up Pricing in Canada,” January 7, 2014.

Amirault, Kwan, and Wilkinson (2004) examine price setting in Canada, and report the results of a survey of 170 private, unregulated, non-primary sector firms in the sectors of construction (10%), manufacturing (26%), trade (14%), and services (49%), in a sample which should give representative results for about 70% of Canada’s output in 2002 (Amirault, Kwan, and Wilkinson 2004: 3–4).

An impressive 67.1% of firms surveyed attributed price inflexibility to “cost-based pricing” – that is, to mark-up pricing (Amirault, Kwan, and Wilkinson 2004: 21).

(3) Eurozone

Literature:
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.

Fabiani, Silvia, Suzanne Loupias, Claire, Monteiro Martins, Fernando Manuel and Roberto Sabbatini. 2007. Pricing Decisions in the Euro Area: How Firms set Prices and Why. Oxford University Press, New York.

“Administered Prices in the Eurozone: Some Empirical Data,” October 16, 2013.

The wide-ranging survey of Fabiani et al. (2006) and (2007) on prices in the Eurozone from many central bank studies finds that the average for mark-up pricing throughout the Eurozone is 54%, a majority of firm prices.

In industrial goods markets in Germany, the largest economy in Europe, a strikingly high 73% of firms have administered prices (Fabiani et al. 2006: 18, Table 4).

(4) the UK

Literature:
Downward, Paul. 1999. Pricing Theory in Post-Keynesian Economics: A Realist Approach. Edward Elgar Publishing, Cheltenham, UK and Northampton, MA.

Greenslade, Jennifer V. and Miles Parker. 2012. “New Insights into Price-Setting Behaviour in the UK: Introduction and Survey Results,” Economic Journal 122.558: F1–F15.

Hall, S., Walsh, M. and A. Yates. 2000. “Are UK Companies’ Prices Sticky?,” Oxford Economic Papers 52.3: 425–446.

“Mark-up Pricing in the UK,” February 15, 2014.

“Downward’s Pricing Theory in Post-Keynesian Economics: Chapter 8,” January 23, 2014.

Hall, Walsh, and Yates (2000) report the results of a survey of 654 UK companies in 1995 carried out by the Bank of England, and mostly of large companies in manufacturing (68% of the survey), as well as some in services (13%), retailing (13%), and construction (6%) (Hall, Walsh, and Yates 2000: 426–428).

The survey asked firms if they recognised a specific “pricing theory as being important” for explaining their pricing behaviour. It was found that 47.1% of firms chose cost-based pricing as the second most important theory (the theory of constant marginal costs came first at 53.8%).

Greenslade and Parker (2012) report the results of a new survey of 693 UK firms (conducted in December 2007 and February 2008) chosen to be representative of the private sector economy of the UK as a whole, including manufacturing, electricity and gas supply, construction, services, and retail trade, but excluding public sector firms or those under regulatory price control (Greenslade and Parker 2012: F13–F14).

When asked how prices for their main product were determined, 68% of firms said that competitors’ prices were “very important” or “important” in determining price (Greenslade and Parker 2012: F9).

The second most important explanation was mark-up pricing, with variable mark-ups (58%) and constant mark-ups (44%) both being important (Greenslade and Parker 2012: F10).

Downward (1999, Chapter 8) presents a survey of 283 UK manufacturing enterprises (Downward 1999: 150–151). When asked whether the firm set its prices for its products by means of a mark-up on average costs, 63.7% of firms said either “very often” (29.9%) or “often” (33.8%). A further 17.3% said “sometimes.” Only 7% said “rarely,” and only 8.1% said “not at all” (Downward 1999: 160).

(5) Ireland

Literature:
Keeney, Mary, Lawless, Martina, and Alan Murphy. 2010. “How Do Firms Set Prices? Survey Evidence from Ireland,” Central Bank of Ireland, Research Technical Papers, no 7/RT/10.
http://ideas.repec.org/p/cbi/wpaper/7-rt-10.html

“Mark-up Pricing in Ireland,” November 22, 2013.

Keeney et al. (2010) report the results of a survey of 1000 Irish firms and finds that the largest type of pricing is mark-up pricing at 44% of firms. Other evidence from their paper, presented in my post here, suggests that the real percentage is higher than this, since when firms were asked how likely it was that they would adjust prices downwards in response to a negative demand shock, 66.5% of firms said that negative demand shocks were of little or no relevance to pricing decisions.

(6) Norway

Literature:
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.
http://www.norges-bank.no/en/about/published/publications/economic-bulletin/economic-bulletin-22008/price-setting-behaviour-of-norwegian-firms--results-of-a-survey/

“Mark-up Pricing in Norway,” November 23, 2013.

Langbraaten et al. (2008) cite a well-sampled survey of 725 firms throughout many sectors of the Norwegian economy that found that 69% of Norwegian businesses use mark-up pricing.

(7) Sweden

Literature:
Apel, Mikael, Friberg, Richard and Kerstin Hallsten. 2005. “Microfoundations of Macroeconomic Price Adjustment: Survey Evidence from Swedish Firms,” Journal of Money, Credit and Banking 37.2: 313–338.

“Mark-up Pricing in Sweden,” January 9, 2014.

Apel et al. (2005) provide data on price setting behaviour in Sweden, from a survey of about 600 private sector firms (Apel et al. 2005: 314) weighted to create a more representative sample of the Swedish economy (Apel et al. 2005: 316), but their study fails to directly ask firms how they set price.

Interestingly, when asked why they leave prices unchanged in response to small changes in demand, many firms said “it is better to leave the price unchanged as long as the costs do not change” (Apel et al. 2005: 323), which gives some support to the view that mark-up pricing is important.

(8) Iceland

Literature:
Ólafsson, Thorvardur Tjörvi, Pétursdóttir, Ásgerdur, and Karen Á. Vignisdóttir. 2011. “Price Setting in Turbulent Times: Survey Evidence from Icelandic Firms,” Working Paper Central Bank of Iceland
www.sedlabanki.is/lisalib/getfile.aspx?itemid=8891‎

“Mark-up Prices in Iceland,” November 25, 2013.

Ólafsson et al. (2011) cite a survey of 580 Icelandic firms and finds that mark-up pricing is the largest type of pricing at 45%. Evidence suggests that more mark-up prices are concealed in the other categories in the survey, so that the real percentage is higher than this.

(9) Netherlands

Literature:
Hoeberichts, Marco and Ad Stokman. 2006. “Price Setting Behaviour in the Netherlands: Results of a Survey,” ECB Working Paper Series No 607 (April)
https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp607.pdf

Hoeberichts, Marco and Ad Stokman. 2007. “A Price Behavior of Dutch 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. 140–151.

“Mark-up Pricing in the Netherlands,” May 2, 2014.

Hoeberichts and Stokman (2006) (reprinted with some changes in Hoeberichts and Stokman 2007) report the results of a survey conducted in May 2004, with 1,246 responses from firms, mainly in the Dutch manufacturing and services sectors (Hoeberichts and Stokman 2006: 7–8).

Of all firms surveyed, 59.3% reported that they used mark-up prices, with variable mark-up being the most widely used form (at 35.4%).

(10) Luxembourg

Literature:
Lünnemann, P. and T. Y. Mathä. 2006. “New Survey Evidence on the Pricing Behaviour of Luxembourg Firms,” ECB Working Paper Series No 617
https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp617.pdf

Lünnemann, P. and T. Y. Mathä. 2007. “A Survey of Price Setting Practices of Luxembourg 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. 124–139.

“Mark-up Pricing in Luxembourg,” April 27, 2014.

Lünnemann and Mathä (2006) report the results of a survey on price setting behaviour in Luxembourg (see also Lünnemann and Mathä 2007).

The survey was conducted by the Banque centrale du Luxembourg in the second half of 2004 and involved responses from 367 firms in the construction, industry, services, trade and retail trade sectors, and the replies were adjusted to be representative of the Luxembourg economy as a whole (Lünnemann and Mathä 2006: 7–8).

Although the survey does not ask firms directly if they use mark-up pricing, there is a considerable amount of indirect evidence that this form of pricing is prevalent.

(11) Belgium

Literature:
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
http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp448.pdf

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.

“Mark-up Pricing in Belgium,” March 26, 2014.

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).

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 46%.

(12) Germany

Literature:
Stahl, Harald. 2005. “Price Setting in German Manufacturing: New Evidence from New Survey Data,” ECB Working Paper Series No. 561
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=868433

Stahl, Harald. 2007. “Price Setting in German Manufacturing: Evidence from New 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. 97–109.

“Mark-up Pricing in Germany,” March 29, 2014.

Stahl (2005) reports the results of a survey on price setting behaviour by German manufacturing firms (see also Stahl 2007).

The survey was conducted in 2004 by the Ifo Institute for the Deutsche Bundesbank (Germany’s central bank) and involved 1,200 manufacturing firms (Stahl 2005: 9–10).

Mark-up pricing accounted for 73% of price setting.

(13) France

Literature:
Loupias, Claire and Roland Ricart. 2004. “Price Setting in France: New evidence from Survey Data,” ECB Working Paper Series No. 423
http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp423.pdf

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.

“Mark-up Pricing in France,” March 28, 2014.

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).

Though mark-up pricing is reported only at 36.9% of firms, it seems clear that the “competitors’ prices” category in the survey 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).

(14) Austria

Literature:
Kwapil, Claudia, Baumgartner, Josef and Johann Scharler. 2005. “Price-Setting Behavior of Austrian Firms,” ECB Working Paper Series no. 464
http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp464.pdf

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.

“Mark-up Pricing in Austria,” March 24, 2014.

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).

Firms were asked to rank 11 different theories of why prices are generally inflexible, and cost-based pricing was ranked the third most important theory.

(15) Italy

Literature:
Fabiani, Silvia, Gattulli, Angela, and Roberto Sabbatini. 2004. “The Pricing Behaviour of Italian Firms: New Survey Evidence on Price Stickiness,” ECB Working Paper Series No. 333
http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp333.pdf

Fabiani, Silvia, Gattulli, Angela, and Roberto Sabbatini. 2007. “The Pricing Behaviour of Italian Firms: New Survey Evidence on Price Stickiness,” 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. 110–123.

“Mark-up Pricing in Italy,” April 19, 2014.

Fabiani, Gattulli and Sabbatini (2004) report the results of a survey on price setting behaviour by Italian firms (see also Fabiani, Gattulli and Sabbatini 2007).

The survey was conducted in January 2003 and involved 333 industrial and service firms (Fabiani et al. 2004: 8), although about 66% were industrial firms. Furthermore, the survey was biased towards firms selling producer goods or wholesale goods (Fabiani et al. 2004: 13).

It was found that 63.1% of firms surveyed used mark-up pricing.

(16) Spain

Literature:
Álvarez, Luis J. and Ignacio Hernando. 2005. “The Price Setting Behaviour of Spanish Firms Evidence from Survey Data,” ECB Working Paper Series No. 538 (October)

Álvarez, Luis J. and Ignacio Hernando. 2007. “Pricing Behavior of Spanish 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. 165–181.

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.

“Mark-up Pricing in Spain,” May 7, 2014.

Álvarez and Hernando (2005) report the results of a survey conducted by a private company between May and September 2004 using a questionnaire prepared by the Banco de España, which involved 2,008 firms from the manufacturing, energy, trade, hotel and restaurant, transport and communications sectors (Álvarez and Hernando 2005: 8). These sectors represent about 51.3% of Spanish Gross Value Added (GVA) (Álvarez and Hernando 2005: 8).

While the survey fails to ask firms whether they use mark-up pricing, nevertheless the results strongly suggest that this form of price setting is important: for example, the survey results indicate that changes in costs of production are the main cause of price increases (Álvarez and Hernando 2005: 36). Moreover, Fabiani et al. (2006: 18, Table 4) report that the percentage of Spanish firms using mark-up pricing is 52% (though it is unclear where this data comes from).

(17) Portugal

Literature:
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)
https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp562.pdf

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.

“Mark-up Pricing in Portugal,” May 6, 2014.

Martins (2005) reports the results of a survey on price setting behaviour of firms in Portugal conducted between May and September 2004 by the Banco de Portugal, which involved 1,370 Portuguese firms, mainly from manufacturing (Martins 2005: 6).

Unfortunately, the survey did not ask firms directly if and how frequently they used mark-up pricing. Nevertheless, 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%.

(18) Japan

Literature:
Hsu, Robert. 1999. “Pricing Practices in Japan,” Global Business and Economics Review 1.2: 164–171.

Nakagawa, S., R. Hattori and I. Takagawa, 2000. “Price-Setting Behaviour of Japanese Companies,” Bank of Japan Research Paper
http://www.boj.or.jp/en/research/brp/ron_2000/ron0009b.htm/

“Mark-up Pricing in Japan,” November 29, 2013.

Nakagawa and Takagawa (2000) cite a survey of 630 Japanese companies. As interpreted by Fabiani et al. (2007: 190), the data suggest that least 54% of Japanese firms use mark-up pricing.

(19) New Zealand

Literature:
Parker, Miles. “Price-Setting Behaviour in New Zealand”
https://cama.crawford.anu.edu.au/amw2013/doc/Parker,Miles.pdf

“Mark-up Pricing in New Zealand,” November 30, 2013.

Parker cites a survey of around 5,300 New Zealand firms that finds that mark-up prices account for about 54% of business prices.

(20) Australia

Literature:
Park, Anna, Rayner, Vanessa and Patrick D’Arcy. 2010. “Price-Setting Behaviour – Insights from Australian Firms,” Reserve Bank of Australia Bulletin (June Quarter): 7–14.
http://www.rba.gov.au/publications/bulletin/2010/jun/bu-0610-2a.html

“Mark-up Pricing in Australia,” November 30, 2013.

Park, Rayner, and D’Arcy (2010) cite a survey of around 700 Australian firms that finds that mark-up prices account for at least 49% of firm prices. Once we add likely mark-up prices concealed in the other categories in the survey, the percentage will be higher than this.

(21) Pakistan

Literature:
Malik, W. S., ul HaqSatti, A. and G. Saghir. 2010. “Price Setting Behaviour of Pakistani Firms: Evidence from Four Industrial Cities of Punjab,” PIDE Working Papers
http://www.eaber.org/node/23069

Malik et al. (2010) provides some interesting evidence on mark-up pricing in Pakistan, and reports the results of a 2008 survey of 343 manufacturing firms in four industrial cities of the Punjab Province (Malik et al. 2010: 2–4).

About 75% of these firms reported that they had more than 20 competitor firms (Malik et al. 2010: 2).

Furthermore, of the 57% of the firms that reported that they set their own prices, 62% reported that they set prices as a mark-up over costs (Malik et al. 2010: 7–8). A further 30% reported that the price of their main competitor was used to set price, and, as in other surveys, it is likely that this category also conceals mark-up pricing.

So even in developing nations, mark-up pricing is significant.

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Kalecki, M. 1954. Theory of Economic Dynamics. Allen and Unwin, London.

Kalecki, M. 1971. Selected Essays on the Dynamics of the Capitalist Economy. Cambridge University Press, Cambridge.

Kaplan, A. D. H., Dirlam, J. B. and Lanzillotti, R. F. 1958. Pricing in Big Business: A Case Approach. The Brookings Institution, Washington DC.

Keeney, Mary, Lawless, Martina, and Alan Murphy. 2010. “How Do Firms Set Prices? Survey Evidence from Ireland,” Central Bank of Ireland, Research Technical Papers, no 7/RT/10.
http://ideas.repec.org/p/cbi/wpaper/7-rt-10.html

Kwapil, Claudia, Baumgartner, Josef and Johann Scharler. 2005. “Price-Setting Behavior of Austrian Firms,” ECB Working Paper Series no. 464
http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp464.pdf

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.

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.
http://www.norges-bank.no/en/about/published/publications/economic-bulletin/economic-bulletin-22008/price-setting-behaviour-of-norwegian-firms--results-of-a-survey/

Lee, Frederic S. 1998. Post Keynesian Price Theory. Cambridge University Press, Cambridge and New York.

Loupias, Claire and Roland Ricart. 2004. “Price Setting in France: New evidence from Survey Data,” ECB Working Paper Series No. 423
http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp423.pdf

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.

Lünnemann, P. and T. Y. Mathä. 2006. “New Survey Evidence on the Pricing Behaviour of Luxembourg Firms,” ECB Working Paper Series No 617
https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp617.pdf

Lünnemann, P. and T. Y. Mathä. 2007. “A Survey of Price Setting Practices of Luxembourg 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. 124–139.

Malik, W. S., ul HaqSatti, A. and G. Saghir. 2010. “Price Setting Behaviour of Pakistani Firms: Evidence from Four Industrial Cities of Punjab,” PIDE Working Papers
http://www.eaber.org/node/23069

Martins, Fernando. 2005. The Price Setting Behaviour of Portuguese Firms Evidence from Survey Data,” ECB Working Paper Series No 562 (December)
https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp562.pdf

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.

Means, G. C. 1992 [1933]. “The Corporate Revolution,” in Frederic S. Lee and Warren J. Samuels (eds.), The Heterodox Economics of Gardiner C. Means: A Collection. M.E. Sharpe, Armonk, N.Y.

Means, G. C. 1935. Industrial Prices and their Relative Inflexibility. US Senate Document no. 13, 74th Congress, 1st Session, Government Printing Office, Washington DC.

Means, G. C. 1936. “Notes on Inflexible Prices,” American Economic Review 26 (Supplement): 23–35.

Means, G. C. 1939–1940. “Big Business, Administered Prices, and the Problem of Full Employment,” Journal of Marketing 4: 370–381.

Means, G. C. 1962. Pricing Power and the Public Interest. Harper and Brothers. New York.

Nakagawa, S., R. Hattori and I. Takagawa, 2000. “Price-Setting Behaviour of Japanese Companies,” Bank of Japan Research Paper
http://www.boj.or.jp/en/research/brp/ron_2000/ron0009b.htm/

Ólafsson, Thorvardur Tjörvi, Pétursdóttir, Ásgerdur, and Karen Á. Vignisdóttir. 2011. “Price Setting in Turbulent Times: Survey Evidence from Icelandic Firms,” Working Paper Central Bank of Iceland
www.sedlabanki.is/lisalib/getfile.aspx?itemid=8891‎

Park, Anna, Rayner, Vanessa and Patrick D’Arcy. 2010. “Price-Setting Behaviour – Insights from Australian Firms,” Reserve Bank of Australia Bulletin (June Quarter): 7–14.
http://www.rba.gov.au/publications/bulletin/2010/jun/bu-0610-2a.html

Parker, Miles. “Price-Setting Behaviour in New Zealand”
https://cama.crawford.anu.edu.au/amw2013/doc/Parker,Miles.pdf

Pittman, Russell. 2009. “Who Are You Calling Irrational? Marginal Costs, Variable Costs, and the Pricing Practices of Firms,” Economic Analysis Group Discussion Paper 09-3
http://www.justice.gov/atr/public/eag/248394.htm

Shim, Eunsup, and Ephraim Sudit. 1995. “How Manufacturers Price Products,” Management Accounting 76.8: 37–39.

Stahl, Harald. 2005. “Price Setting in German Manufacturing: New Evidence from New Survey Data,” ECB Working Paper Series No. 561
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=868433

Stahl, Harald. 2007. “Price Setting in German Manufacturing: Evidence from New 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. 97–109.

Appendix 1
Below are the main surveys and articles in the “full cost” and marginalist pricing debate of the 1940s to 1970s

Against Marginalism
Kaplan, A. D. H., Dirlam, J. B. and Lanzillotti, R. F. 1958. Pricing in Big Business: A Case Approach. The Brookings Institution, Washington DC.

Lanzillotti, Robert F. 1958. “Pricing Objectives in Large Companies,” American Economic Review 48.5: 921–940.

Kahn, Alfred E. 1959. “Pricing Objectives in Large Companies: Comment,” American Economic Review 49.4: 670–678.

Lanzillotti, Robert F. 1959. “Pricing Objectives in Large Companies: Reply,” American Economic Review 49.4: 679-687.

Barback, R. H. 1964. Pricing of Manufactures. Macmillan and Co Ltd., London.

Wentz, Theodore E. 1966. “Realism in Pricing Analyses,” Journal of Marketing 30.2: 19–26.

Skinner, R. C. 1970. “The Determination of Selling Prices,” Journal of Industrial Economics 18.3: 201–217.

Sizer, John. 1971. “Note on ‘the Determination of Selling Prices,’” The Journal of Industrial Economics 20.1: 85–89.

Hague, D. C. 1971. Pricing in Business. George Allen and Unwin, London.

Burck, G. 1972. “The Myths and Realities of Corporate Pricing,” Fortune 85.4: 85–89, 125–126.

Atkin, B. and Skinner, R. 1975. How British Industry Prices. Industrial Market Research Limited, London.

Shipley, David D. 1981. “Pricing Objectives in British Manufacturing Industry,” The Journal of Industrial Economics 29.4: 429–443.

Gordon, L. A., Cooper, R., Falk, H., and D. Miller. 1981. The Pricing Decision. National Association of Accountants, New York.

Hankinson, A. 1985. A Study of Pricing Behaviour of Dorset-Hampshire Small Engineering Firms. Dorset Institute of Higher Education, Poole, Dorset.

Bruegelman, T., Haessly, G., Wolfangel, C. P. and Schiff, M. 1985. “How Variable Costing is used in Pricing Decisions,” Management Accounting 66: 58–61, 65.

Samiee, S. 1987. “Pricing in Marketing Strategies of US- and Foreign-based Firms,” Journal of Business Research 15: 17–30.

Defending Marginalism
Gordon, R. A. 1948. “Short Period Price Determination in Theory and Practice,” American Economic Review 38: 265–288.

Hague, D. C. 1949–1950. “Economic Theory and Business Behaviour,” Review of Economic Studies 16: 144–157.

Edwards, R. S. 1952. “The Pricing of Manufactured Products,” Economica 19: 298–307.

Simon, H. A. 1952. “A Behavioural Model of Rational Choice,” Quarterly Journal of Economics 69: 99–118.

Simon, H. A. 1959. “Theories of Decision Making in Economies,” American Economic Review 49: 253–283.

Simon, H. A. 1962. “New Developments in the Theory of the Firm,” American Economic Review 52: 1–15.

Shackle, G. L. S. 1955. “Businessmen on Business Decisions,” Scottish Journal of Political Economy 2: 32–46.

Earley, James S. 1956. “Marginal Policies of ‘Excellently Managed’ Companies,” American Economic Review 46.1: 44–70.

Cook, A. C., Dufty, N. F. and Jones, E. H. 1956. “Full Cost Pricing in the Multiproduct Firm,” The Economic Record 32: 142–147.

Pearce, I. F. 1956. “A Study in Price Policy,” Economica n.s. 23.90: 114–127.

Pearce, I. F. and Amey, L. R. 1956–1957. “Price Policy with a Branded Product,” The Review of Economic Studies 24: 49–60.

Fog, B. 1960. Industrial Pricing Policies: An Analysis of Pricing Policies of Danish Manufacturers. North Holland Publishing, Amsterdam.

Knox, R. L. 1966. “Competitive Oligopolistic Pricing,” Journal of Marketing 30: 47–51.

Neutral Studies
Alt, R. M. 1949. “The Internal Organisation of the Firm and Price Formation: An Illustrative Case,” Quarterly Journal of Economics 63: 92–110.

Woodruff, W. 1953. “Early Entrepreneurial Behaviour in Relation to Costs and Prices,” Oxford Economic Papers 5: 41–64.

Blackwell, R. 1953–1954. “The Pricing of Books,” Journal of Industrial Economics 2: 174–183.

Cook, A. and Jones, F. 1954. “Full Cost Pricing in Western Australia,” The Economic Record 30: 272–274.

Balkin, N. 1956. “Prices in the Clothing Industry,” Journal of Industrial Economics 5.1: 1–15.

Lazer, W. 1956–1957. “Price Determination in the Western Canadian Garment Industry,” Journal of Industrial Economics 5: 124–136.

Pool, A. G. and Llewellyn, G. 1957. The British Hosiery Industry: A Study in Competition. Leicester University Press, Leicester.

Lydall, H. F. 1958. “Aspects of Competition in Manufacturing Industry,” Institute of Economics and Statistics Bulletin 20: 319–337.

Haynes, W. W. 1962. Pricing Decisions in Small Business. University of Kentucky Press, Lexington, KY.

Haynes, W. W. 1964. “Pricing Practices in Small Firms,” The Southern Economic Journal 30: 315–324.

Lanzillotti, R. F. 1964. Pricing Production and the Marketing Policies of Small Manufacturers. Washington State University Press, Pullman, Washington.

Rosendale, R. B. 1973. “The Short Run Pricing Policies of Some British Engineering Exporters,” National Institute Economic Review 65: 44–51.

Nowotny, Ewald and Herbert Walther. 1978. “The Kinked Demand Curve—Some Empirical Observations,” Kyklos 31: 53–67.

Forgionne, G. A. 1984. “Economic Tools used by Management in Large American Operated Corporations,” Business Economics 19: 5–17.

Jobber, D. and Hooley, G. 1987. “Price Behaviour in the UK Manufacturing Service Industries,” Managerial and Decision Economics 8.2: 167–171.

Smiley, Robert. 1988. “Empirical Evidence on Strategic Entry Deterrence,” International Journal of Industrial Organization 6.2: 167—180.

Blinder, Alan S. 1991. “Why are Prices Sticky? Preliminary Results from an Interview Study,” American Economic Review 81.2: 89–96.

Additional Studies
Alchian, A. A. 1950. “Uncertainty, Evolution and Economic Theory,” Journal of Political Economy 58: 211–221.

Robinson, A. 1950. “The Pricing of Manufactured Products,” Economic Journal 60: 771–780.

Machlup, F. 1946. “Marginal Analysis and Empirical Research,” American Economic Review 36: 519–554.

Heflebower, R. F. 1955. “Full Costs, Cost Changes, and Prices,” in National Bureau of Economic Research, Business Concentration and Price Policy. Princeton University Press, Princeton. 361–392.

Coase, R. 1955. “Full Cost, Cost Changes, and Prices: Comment,” in National Bureau of Economic Research, Business Concentration and Public Policy. Princeton University Press, Princeton. 392–394.

Wiles, P. 1950. “Empirical Research and the Marginal Analysis,” Economic Journal 60: 515–530.

Robinson, J. V. 1953. “Imperfect Competition Revisited,” Economic Journal 63: 579–593.

Mark-up Pricing in Western Europe: The Empirical Evidence

Below is a nation by nation review of the empirical evidence for the extent of mark-up pricing (or administered prices, or “average cost prices,” “full cost prices,” “normal cost prices,” or “cost-plus prices”) in Western Europe:

(1) the UK

Literature:
Downward, Paul. 1999. Pricing Theory in Post-Keynesian Economics: A Realist Approach. Edward Elgar Publishing, Cheltenham, UK and Northampton, MA.

Greenslade, Jennifer V. and Miles Parker. 2012. “New Insights into Price-Setting Behaviour in the UK: Introduction and Survey Results,” Economic Journal 122.558: F1–F15.

Hall, S., Walsh, M. and A. Yates. 2000. “Are UK Companies’ Prices Sticky?,” Oxford Economic Papers 52.3: 425–446.

“Mark-up Pricing in the UK,” February 15, 2014.

“Downward’s Pricing Theory in Post-Keynesian Economics: Chapter 8,” January 23, 2014.

Hall, Walsh, and Yates (2000) report the results of a survey of 654 UK companies in 1995 carried out by the Bank of England, and mostly of large companies in manufacturing (68% of the survey), as well as some in services (13%), retailing (13%), and construction (6%) (Hall, Walsh, and Yates 2000: 426–428).

The survey asked firms if they recognised a specific “pricing theory as being important” for explaining their pricing behaviour. It was found that 47.1% of firms chose cost-based pricing as the second most important theory (the theory of constant marginal costs came first at 53.8%).

Greenslade and Parker (2012) report the results of a new survey of 693 UK firms (conducted in December 2007 and February 2008) chosen to be representative of the private sector economy of the UK as a whole, including manufacturing, electricity and gas supply, construction, services, and retail trade, but excluding public sector firms or those under regulatory price control (Greenslade and Parker 2012: F13–F14).

When asked how prices for their main product were determined, 68% of firms said that competitors’ prices were “very important” or “important” in determining price (Greenslade and Parker 2012: F9).

The second most important explanation was mark-up pricing, with variable mark-ups (58%) and constant mark-ups (44%) both being important (Greenslade and Parker 2012: F10).

Downward (1999, Chapter 8) presents a survey of 283 UK manufacturing enterprises (Downward 1999: 150–151). When asked whether the firm set its prices for its products by means of a mark-up on average costs, 63.7% of firms said either “very often” (29.9%) or “often” (33.8%). A further 17.3% said “sometimes.” Only 7% said “rarely,” and only 8.1% said “not at all” (Downward 1999: 160).

(2) Ireland

Literature:
Keeney, Mary, Lawless, Martina, and Alan Murphy. 2010. “How Do Firms Set Prices? Survey Evidence from Ireland,” Central Bank of Ireland, Research Technical Papers, no 7/RT/10.
http://ideas.repec.org/p/cbi/wpaper/7-rt-10.html

“Mark-up Pricing in Ireland,” November 22, 2013.

Keeney et al. (2010) report the results of a survey of 1000 Irish firms and finds that the largest type of pricing is mark-up pricing at 44% of firms. Other evidence from their paper, presented in my post here, suggests that the real percentage is higher than this, since when firms were asked how likely it was that they would adjust prices downwards in response to a negative demand shock, 66.5% of firms said that negative demand shocks were of little or no relevance to pricing decisions.

(3) Norway

Literature:
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.
http://www.norges-bank.no/en/about/published/publications/economic-bulletin/economic-bulletin-22008/price-setting-behaviour-of-norwegian-firms--results-of-a-survey/

“Mark-up Pricing in Norway,” November 23, 2013.

Langbraaten et al. (2008) cite a well-sampled survey of 725 firms throughout many sectors of the Norwegian economy that found that 69% of Norwegian businesses use mark-up pricing.

(4) Sweden

Literature:
Apel, Mikael, Friberg, Richard and Kerstin Hallsten. 2005. “Microfoundations of Macroeconomic Price Adjustment: Survey Evidence from Swedish Firms,” Journal of Money, Credit and Banking 37.2: 313–338.

“Mark-up Pricing in Sweden,” January 9, 2014.

Apel et al. (2005) provide data on price setting behaviour in Sweden, from a survey of about 600 private sector firms (Apel et al. 2005: 314) weighted to create a more representative sample of the Swedish economy (Apel et al. 2005: 316), but their study fails to directly ask firms how they set price.

Interestingly, when asked why they leave prices unchanged in response to small changes in demand, many firms said “it is better to leave the price unchanged as long as the costs do not change” (Apel et al. 2005: 323), which gives some support to the view that mark-up pricing is important.

(5) Iceland

Literature:
Ólafsson, Thorvardur Tjörvi, Pétursdóttir, Ásgerdur, and Karen Á. Vignisdóttir. 2011. “Price Setting in Turbulent Times: Survey Evidence from Icelandic Firms,” Working Paper Central Bank of Iceland
www.sedlabanki.is/lisalib/getfile.aspx?itemid=8891‎

“Mark-up Prices in Iceland,” November 25, 2013.

Ólafsson et al. (2011) cite a survey of 580 Icelandic firms and finds that mark-up pricing is the largest type of pricing at 45%. Evidence suggests that more mark-up prices are concealed in the other categories in the survey, so that the real percentage is higher than this.

(6) Netherlands

Literature:
Hoeberichts, Marco and Ad Stokman. 2006. “Price Setting Behaviour in the Netherlands: Results of a Survey,” ECB Working Paper Series No 607 (April)
https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp607.pdf

Hoeberichts, Marco and Ad Stokman. 2007. “A Price Behavior of Dutch 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. 140–151.

“Mark-up Pricing in the Netherlands,” May 2, 2014.

Hoeberichts and Stokman (2006) (reprinted with some changes in Hoeberichts and Stokman 2007) report the results of a survey conducted in May 2004, with 1,246 responses from firms, mainly in the Dutch manufacturing and services sectors (Hoeberichts and Stokman 2006: 7–8).

Of all firms surveyed, 59.3% reported that they used mark-up prices, with variable mark-up being the most widely used form (at 35.4%).

(7) Luxembourg

Literature:
Lünnemann, P. and T. Y. Mathä. 2006. “New Survey Evidence on the Pricing Behaviour of Luxembourg Firms,” ECB Working Paper Series No 617
https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp617.pdf

Lünnemann, P. and T. Y. Mathä. 2007. “A Survey of Price Setting Practices of Luxembourg 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. 124–139.

“Mark-up Pricing in Luxembourg,” April 27, 2014.

Lünnemann and Mathä (2006) report the results of a survey on price setting behaviour in Luxembourg (see also Lünnemann and Mathä 2007).

The survey was conducted by the Banque centrale du Luxembourg in the second half of 2004 and involved responses from 367 firms in the construction, industry, services, trade and retail trade sectors, and the replies were adjusted to be representative of the Luxembourg economy as a whole (Lünnemann and Mathä 2006: 7–8).

Although the survey does not ask firms directly if they use mark-up pricing, there is a considerable amount of indirect evidence that this form of pricing is prevalent.

(8) Belgium

Literature:
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
http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp448.pdf

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.

“Mark-up Pricing in Belgium,” March 26, 2014.

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).

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 46%.

(9) Germany

Literature:
Stahl, Harald. 2005. “Price Setting in German Manufacturing: New Evidence from New Survey Data,” ECB Working Paper Series No. 561
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=868433

Stahl, Harald. 2007. “Price Setting in German Manufacturing: Evidence from New 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. 97–109.

“Mark-up Pricing in Germany,” March 29, 2014.

Stahl (2005) reports the results of a survey on price setting behaviour by German manufacturing firms (see also Stahl 2007).

The survey was conducted in 2004 by the Ifo Institute for the Deutsche Bundesbank (Germany’s central bank) and involved 1,200 manufacturing firms (Stahl 2005: 9–10).

Mark-up pricing accounted for 73% of price setting.

(10) France

Literature:
Loupias, Claire and Roland Ricart. 2004. “Price Setting in France: New evidence from Survey Data,” ECB Working Paper Series No. 423
http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp423.pdf

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.

“Mark-up Pricing in France,” March 28, 2014.

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).

Though mark-up pricing is reported only at 36.9% of firms, it seems clear that the “competitors’ prices” category in the survey 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).

(11) Austria

Literature:
Kwapil, Claudia, Baumgartner, Josef and Johann Scharler. 2005. “Price-Setting Behavior of Austrian Firms,” ECB Working Paper Series no. 464
http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp464.pdf

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.

“Mark-up Pricing in Austria,” March 24, 2014.

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).

Firms were asked to rank 11 different theories of why prices are generally inflexible, and cost-based pricing was ranked the third most important theory.

(12) Italy

Literature:
Fabiani, Silvia, Gattulli, Angela, and Roberto Sabbatini. 2004. “The Pricing Behaviour of Italian Firms: New Survey Evidence on Price Stickiness,” ECB Working Paper Series No. 333
http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp333.pdf

Fabiani, Silvia, Gattulli, Angela, and Roberto Sabbatini. 2007. “The Pricing Behaviour of Italian Firms: New Survey Evidence on Price Stickiness,” 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. 110–123.

“Mark-up Pricing in Italy,” April 19, 2014.

Fabiani, Gattulli and Sabbatini (2004) report the results of a survey on price setting behaviour by Italian firms (see also Fabiani, Gattulli and Sabbatini 2007).

The survey was conducted in January 2003 and involved 333 industrial and service firms (Fabiani et al. 2004: 8), although about 66% were industrial firms. Furthermore, the survey was biased towards firms selling producer goods or wholesale goods (Fabiani et al. 2004: 13).

It was found that 63.1% of firms surveyed used mark-up pricing.

(13) Spain

Literature:
Álvarez, Luis J. and Ignacio Hernando. 2005. “The Price Setting Behaviour of Spanish Firms Evidence from Survey Data,” ECB Working Paper Series No. 538 (October)

Álvarez, Luis J. and Ignacio Hernando. 2007. “Pricing Behavior of Spanish 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. 165–181.

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.

“Mark-up Pricing in Spain,” May 7, 2014.

Álvarez and Hernando (2005) report the results of a survey conducted by a private company between May and September 2004 using a questionnaire prepared by the Banco de España, which involved 2,008 firms from the manufacturing, energy, trade, hotel and restaurant, transport and communications sectors (Álvarez and Hernando 2005: 8). These sectors represent about 51.3% of Spanish Gross Value Added (GVA) (Álvarez and Hernando 2005: 8).

While the survey fails to ask firms whether they use mark-up pricing, nevertheless the results strongly suggest that this form of price setting is important: for example, the survey results indicate that changes in costs of production are the main cause of price increases (Álvarez and Hernando 2005: 36). Moreover, Fabiani et al. (2006: 18, Table 4) report that the percentage of Spanish firms using mark-up pricing is 52% (though it is unclear where this data comes from).

(14) Portugal

Literature:
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)
https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp562.pdf

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.

“Mark-up Pricing in Portugal,” May 6, 2014.

Martins (2005) reports the results of a survey on price setting behaviour of firms in Portugal conducted between May and September 2004 by the Banco de Portugal, which involved 1,370 Portuguese firms, mainly from manufacturing (Martins 2005: 6).

Unfortunately, the survey did not ask firms directly if and how frequently they used mark-up pricing. Nevertheless, 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%.

BIBLIOGRAPHY
Apel, Mikael, Friberg, Richard and Kerstin Hallsten. 2005. “Microfoundations of Macroeconomic Price Adjustment: Survey Evidence from Swedish Firms,” Journal of Money, Credit and Banking 37.2: 313–338.

Álvarez, Luis J. and Ignacio Hernando. 2005. “The Price Setting Behaviour of Spanish Firms Evidence from Survey Data,” ECB Working Paper Series No. 538 (October)

Álvarez, Luis J. and Ignacio Hernando. 2007. “Pricing Behavior of Spanish 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. 165–181.

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
http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp448.pdf

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.
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.

Downward, Paul. 1999. Pricing Theory in Post-Keynesian Economics: A Realist Approach. Edward Elgar Publishing, Cheltenham, UK and Northampton, MA.

Fabiani, S., Druant, M., Hernando, I., Kwapil, C., Landau, B., Loupias, C., Martins, F., Mathä, T., Sabbatini, R., Stahl, H. 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.

Fabiani, Silvia, Gattulli, Angela, and Roberto Sabbatini. 2004. “The Pricing Behaviour of Italian Firms: New Survey Evidence on Price Stickiness,” ECB Working Paper Series No. 333
http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp333.pdf

Fabiani, Silvia, Gattulli, Angela, and Roberto Sabbatini. 2007. “The Pricing Behaviour of Italian Firms: New Survey Evidence on Price Stickiness,” 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. 110–123.

Greenslade, Jennifer V. and Miles Parker. 2012. “New Insights into Price-Setting Behaviour in the UK: Introduction and Survey Results,” Economic Journal 122.558: F1–F15.

Hall, S., Walsh, M. and A. Yates. 2000. “Are UK Companies’ Prices Sticky?,” Oxford Economic Papers 52.3: 425–446.

Hoeberichts, Marco and Ad Stokman. 2006. “Price Setting Behaviour in the Netherlands: Results of a Survey,” ECB Working Paper Series No 607 (April)
https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp607.pdf

Hoeberichts, Marco and Ad Stokman. 2007. “A Price Behavior of Dutch 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. 140–151.

Keeney, Mary, Lawless, Martina, and Alan Murphy. 2010. “How Do Firms Set Prices? Survey Evidence from Ireland,” Central Bank of Ireland, Research Technical Papers, no 7/RT/10.
http://ideas.repec.org/p/cbi/wpaper/7-rt-10.html

Kwapil, Claudia, Baumgartner, Josef and Johann Scharler. 2005. “Price-Setting Behavior of Austrian Firms,” ECB Working Paper Series no. 464
http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp464.pdf

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.

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.
http://www.norges-bank.no/en/about/published/publications/economic-bulletin/economic-bulletin-22008/price-setting-behaviour-of-norwegian-firms--results-of-a-survey/

Loupias, Claire and Roland Ricart. 2004. “Price Setting in France: New evidence from Survey Data,” ECB Working Paper Series No. 423
http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp423.pdf

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.

Lünnemann, P. and T. Y. Mathä. 2006. “New Survey Evidence on the Pricing Behaviour of Luxembourg Firms,” ECB Working Paper Series No 617
https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp617.pdf

Lünnemann, P. and T. Y. Mathä. 2007. “A Survey of Price Setting Practices of Luxembourg 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. 124–139.

Martins, Fernando. 2005. The Price Setting Behaviour of Portuguese Firms Evidence from Survey Data,” ECB Working Paper Series No 562 (December)
https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp562.pdf

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.

Ólafsson, Thorvardur Tjörvi, Pétursdóttir, Ásgerdur, and Karen Á. Vignisdóttir. 2011. “Price Setting in Turbulent Times: Survey Evidence from Icelandic Firms,” Working Paper Central Bank of Iceland
www.sedlabanki.is/lisalib/getfile.aspx?itemid=8891‎

Stahl, Harald. 2005. “Price Setting in German Manufacturing: New Evidence from New Survey Data,” ECB Working Paper Series No. 561
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=868433

Stahl, Harald. 2007. “Price Setting in German Manufacturing: Evidence from New 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. 97–109.

Mark-up Pricing in Spain

Álvarez and Hernando (2005) report the results of a survey on price setting behaviour of firms in Spain (see also Álvarez and Hernando 2007).

The research was conducted by a private company between May and September 2004 using a questionnaire prepared by the Banco de España, and involved 2,008 firms from the manufacturing, energy, trade, hotel and restaurant, transport and communications sectors (Álvarez and Hernando 2005: 8). These sectors represent about 51.3% of Spanish Gross Value Added (GVA) (Álvarez and Hernando 2005: 8).

The median firm changes the price of its main product once a year (Álvarez and Hernando 2005: 20).

The firms were asked to assess the importance of nine theories explaining price rigidity and rank these theories with a score 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) Coordination failure

(3) Explicit contracts

(4) Temporary shocks

(5) Quality signal

(6) Pricing points

(7) Menu costs

(8) Change non-price factors

(9) Information costs.

These results are in line with other surveys.

While the survey fails to ask firms whether they use mark-up pricing, nevertheless the results strongly suggest that this form of price setting is important: for example, the survey results indicate that changes in costs of production are the main cause of price increases (Álvarez and Hernando 2005: 36).

Fabiani et al. (2006: 18, Table 4) report that the percentage of Spanish firms using mark-up pricing is 52%, but it is unclear where this data comes from.

BIBLIOGRAPHY
Álvarez, Luis J. and Ignacio Hernando. 2005. “The Price Setting Behaviour of Spanish Firms Evidence from Survey Data,” ECB Working Paper Series No. 538 (October)

Álvarez, Luis J. and Ignacio Hernando. 2007. “Pricing Behavior of Spanish 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. 165–181.

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.

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.

BIBLIOGRAPHY
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)
https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp562.pdf

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.

Mark-up Pricing in the Netherlands

Hoeberichts and Stokman (2006) report the results of a survey on price setting behaviour of firms in the Netherlands (see also Hoeberichts and Stokman 2007).

The research was conducted in May 2004 with a survey based on a questionnaire prepared by the Nederlandsche Bank, and 1,246 responses from firms were received, mainly in manufacturing and services (Hoeberichts and Stokman 2006: 7–8).

The results were then adjusted to be representative of the Dutch economy as a whole (Hoeberichts and Stokman 2006: 7).

The firms were asked how they determine the price of their main or typical product (Hoeberichts and Stokman 2006: 15).

The following results were obtained:

(1) Fixed markup 23.9%;

(2) Variable markup 35.4%;

(3) Competitors prices 21.6%;

(4) Linked to other variable (e.g. wages) 10.2%;

(5) Prices depend on customers 5.5%;

(6) Other 3.5%.
(Hoeberichts and Stokman 2006: 15).

Of all firms surveyed, 59.3% reported that they use mark-up prices, with variable mark-up being the most widely used form (at 35.4%).

Firms were also asked to rank eight theories explaining price stickiness, and they were ranked from the most important to least important as follows:

(1) Implicit contracts

(2) Nominal contracts

(3) Judging quality by price

(4) Temporary shocks

(5) Co-ordination failure

(6) Change non-price factors

(7) Pricing thresholds

(8) Menu costs.
(Hoeberichts and Stokman 2006: 17).

These results are broadly in line with other surveys, and show that both “implicit” contracts (the tendency for firms to feel bound to maintain price stability for their customers) and explicit nominal contracts are a major source of price rigidity, in addition to mark-up pricing.

BIBLIOGRAPHY
Hoeberichts, Marco and Ad Stokman. 2006. “Price Setting Behaviour in the Netherlands: Results of a Survey,” ECB Working Paper Series No 607 (April)
https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp607.pdf

Hoeberichts, Marco and Ad Stokman. 2007. “A Price Behavior of Dutch 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. 140–151.

Mark-up Pricing in Luxembourg

Lünnemann and Mathä (2006) report the results of a survey on price setting behaviour of firms in Luxembourg (see also Lünnemann and Mathä 2007).

The survey was conducted by the Banque centrale du Luxembourg in the second half of 2004 and involved responses from 367 firms in the construction, industry, services, trade and retail trade sectors, and the replies were adjusted to be representative of the Luxembourg economy as a whole (Lünnemann and Mathä 2006: 7–8).

An interesting finding was that 76% of firms generate the largest share of their turnover with long-term customers (Lünnemann and Mathä 2006: 12).

An unusual finding was that purely state-dependent price reviews were more frequent than purely time-dependent rules (Lünnemann and Mathä 2006: 17), but despite this it was found too that the median firm in the survey changed its price twice a year and 28% of firms just once a year (Lünnemann and Mathä 2006: 21).

Firms were given 15 proposed theories to explain price stickiness, and were asked to rank the importance of these theories from “unimportant” (1) to “very important” (4).

The following results were obtained:

(1) Implicit contracts;

(2) Constant marginal cost;

(3) Explicit contracts;

(4) Procyclical elasticity of demand;

(5) Thick markets demand;

(6) Fixed costs / liquidity constraints;

(7) Price means Quality;

(8) Thick markets supply;

(9) Coordination failure;

(10) Threshold pricing;

(11) Temporary shock;

(12) Countercyclical finance;

(13) Menu costs;

(14) Non-price factors;

(15) Costly information.
(Lünnemann and Mathä 2006: 27).

The failure to include cost-based pricing is a bad failing of the survey, but the finding that increases in labour costs and other factor costs are the most important cause of price movements upwards tends to confirm that mark-up pricing must be a significant form of price setting (Lünnemann and Mathä 2006: 30). In contrast, a surge in demand was seen at the least important factor explaining price increases (Lünnemann and Mathä 2006: 30).

The effect of demand on price can be seen in this finding:

“... following a substantial increase in demand for their main product, almost every second firm does not change their price at all. The share of firms not adjusting their prices following an increase in demand is particularly sizeable in the trade sector (almost 60%).” (Lünnemann and Mathä 2006: 33).

For price decreases, the most important factors were price reductions by competitors and falling wage costs (Lünnemann and Mathä 2006: 31).

Though this survey is flawed by its failure to ask firms directly whether they use cost-based pricing, nevertheless the evidence on the importance of costs in relation to price and the weak role of demand are suggestive, and the importance of constant marginal cost to many firms are all important findings.

BIBLIOGRAPHY
Lünnemann, P. and T. Y. Mathä. 2006. “New Survey Evidence on the Pricing Behaviour of Luxembourg Firms,” ECB Working Paper Series No 617
https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp617.pdf

Lünnemann, P. and T. Y. Mathä. 2007. “A Survey of Price Setting Practices of Luxembourg 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. 124–139.

Bob Murphy on 1970s Inflation

Bob Murphy discusses the inflation of the 1970s here.

It is a perfect example of how Austrians are still mired in the false and misleading quantity theory of money, and all its mistaken assumptions.

He uses the following graph (which can be opened in a separate window) showing M2 money supply growth rates with the CPI inflation rates.

The key to understanding and interpreting this graph are the theories of

(1) endogenous money and
(2) mark-up pricing.

Furthermore, the supply shocks and wage-price spirals of the 1970s – the historically specific factors – cannot be ignored either.

First, let us dispose of the quantity theory of money and explain endogenous money theory.

There are two main versions of quantity theory, as follows:

(1) The Equation of Exchange: MV = PT,
where
M = quantity of money;
V = velocity of circulation;
P = general price level, and
T = total number of transactions.

(2) the Cambridge Cash Balance equation: M = k_d PY,
where
M = supply of money;
k_d = demand to hold money per unit of money income;
P = general price level, and
Y = volume of all transactions in the value of national income.

A number of assumptions have to be made for the quantity theory to explain changes in the price level, as follows:

(1) prices are flexible and respond to demand changes in either (1) both the short and long run, or (2) at least in the long run. Related to this is a tacit assumption that the economy is near equilibrium in the sense of full use of resources and high employment, where stocks and capacity utilization are not fundamental methods that firms use to deal with changes in the demand for their products.

(2) money supply is exogenous;

(3) under the equation of exchange, for an increase in M to lead to a proportional increase in P, both V and T must be assumed to be stable.

Under the Cambridge Cash Balance equation, M and P are causally related, if k_d and Y are constant (Thirlwall 1999).

(4) the direction of causation. The quantity theory assumes the direction of causation runs from money supply increase to price rises.

(5) in some extreme forms there is the assumption, following from (1), that money supply increases induce direct and proportional changes in the price level. (I will just note as an aside that Austrians already reject this, because they emphasise Cantillon effects, the idea that price level changes caused by increases in the quantity of money depend on the way new money is injected into the economy, and actually where it affects prices first.)

So how realistic are these assumptions?

The answer is not very realistic at all:

(1) most prices are mark-up prices and relatively inflexible with respect to demand changes in both the short and long run. Most capitalist economies are far from full use of resources, and even in booms businesses make use of stocks and capacity utilisation to manage demand changes, rather than changes in prices.

(2) money supply is largely endogenous;

(3) The velocity of money and demand for money are unstable, subject to shocks and move pro-cyclically (Leo 2005; Levy-Orlik 2012: 170);

(4) the direction of causation. Under an endogenous system the direction of causation is generally from credit demand (via business loans to finance labour and other factor inputs) to money supply increases (Robinson 1970; Davidson and Weintraub 1973).

Therefore the direction of causation generally runs:

credit demand → broad money supply increase → base money increase. (Moore 2003: 118).

This is true, as noted above, since the money supply is endogenous: most of the money supply is “broad money” or bank money, and that is increased by credit expansion in the form of bank loans.

(5) that money supply growth necessarily or generally induces direct and proportional changes in the price level is empirically false (De Grauwe and Polan 2005).

We can see here why broad money supply growth precedes inflation or real output changes.

The reason is that (1) money is largely endogenous and (2) growth in the broad money supply is generally caused by credit growth. Many businesses finance their wage and other factor input bills with credit from banks, so that before real output grows money supply will grow.

Cost-push inflation happens in the same way: when (1) workers or unions demand higher wages and businesses agree to these increases and/or (2) prices of other factor inputs rise, then businesses will need to obtain higher levels of credit from banks. Hence broad money supply growth rates rise, but this rise precedes price increases because businesses will generally raise mark-up prices to maintain profit margins at a later time, given that most firms engage in time-dependent reviews and changes of their prices at regular intervals.

The process of a wage–price spiral involves actually this type of phenomenon, but in a vicious circle.

This crucial point about the direction of causation in the relationship between money supply and output/prices is discussed by Joan Robinson:

“The correlations to be explained [sc. in the relationship between money supply and real output] could be set out in quantity theory terms if the equation were read right-handed. Thus we might suggest that a marked rise in the level of activity is likely to be preceded by an increase in the supply of money (if M is widely defined) or in the velocity of circulation (if M is narrowly defined) because a rise in the wage bill and in borrowing for working capital is likely to precede an increase in the value of output appearing in the statistics. Or that a fall in activity sharp enough to cause losses deprives the banks of credit-worthy borrowers and brings a contraction in their position. But the tradition of Chicago consists in reading the equation from left to right. Then the observed relations are interpreted without any hypothesis at all except post hoc ergo propter hoc.” (Robinson 1970: 510–511).

Secondly, we need to understand mark-up pricing.

Many businesses – and probably a majority in any given developed capitalist economy – set their prices mainly as a profit mark-up on total average unit costs (that is, fixed plus variable costs).

Prices tend to change when total average unit costs change or when the firm wants to change its profit mark-up, and therefore supply costs are the important factor causing price changes (the overwhelming empirical evidence proving that mark-up pricing is prevalent throughout the developed world is here).

Although demand-side inflation is a real and important phenomenon, it is not the only major cause of inflation. In fact, often demand-side inflation is a grossly overestimated cause of inflation and the really important cause is increases in mark-up prices by cost-push inflation: for mark-up prices are, generally speaking, not responsive to changes in demand (Kaldor 1976: 217).

In the post-WWII world when unions were much stronger, collective bargaining in wages prevalent, and cost of living clauses standard in wage contracts, a sufficiently large rise in wages or spike in energy or raw materials costs could set off wage–price spirals, as businesses maintained their profit margin by simply raising their mark-up prices.

Now we have sketched the two theories we need to understand inflation, in addition to demand-led inflation, we can turn to an actual explanation of the 1970s inflation from its origin in the late 1960s until 1975.

We can break down the inflation trends as follows:

(1) Phase 1: 1967–1971
The US saw a spike in inflation from October 1967 to February 1970. Then inflation turned around and, although high, inflation rates gradually fell right down to June 1972.

This was preceded by a spike in M2 growth rates from January 1967 to January 1968.

In the United States, unemployment had fallen to 3.8% in 1966 and 3.6% in 1968, historically low levels. Low unemployment led to some bidding up of wages in this period in the non-unionised sector. Unionised workers in turn also demanded higher wages. The inflation in the US, then, was driven by unusually higher wage demands (Kaldor 1976: 224), just as it was throughout other Western countries. As Nicholas Kaldor noted, around 1968–1969, similar types of wage rises occurred in Japan, France, Belgium and the Netherlands, and from 1969–1970 in Germany, Italy, Switzerland and the UK, which Kaldor attributed largely to trade union action (Kaldor 1976: 224).

But then the US recession from December 1969 to November 1970 struck, and there was a marked decrease in inflation and M2 growth rates.

From April 1970, acceleration in M2 growth rates began again and (as we would expect) preceded the recovery in real output that ended this recession.

But M2 growth rates soared to a high level from April 1970 to July 1971, as the expansion in the business cycle occurred and higher wage demands continued.

The momentous event that would set the stage for the inflation in the next phase was the end of the Bretton Woods system on August 15, 1971, when Nixon closed the gold window.

The end of Bretton Woods was momentous: inflationary expectations and instability on financial and commodity markets resulted, as well as a rise in commodity speculation as a hedge against inflation. This contributed to the cost-push inflation that was being felt in many countries after 1971.

Nevertheless, the end of Bretton Woods in August, 1971 did not suddenly unleash run-away inflation. As we see in the chart, US inflation rates continued to fall until June 1972.

(2) Phase 2: 1971–1974
The spike in US inflation began again in June 1972 and continued until December 1974.

What caused this? Three major factors did:

(1) an explosion in commodity prices from 1972;

(2) wage–price spirals, and

(3) the first oil shock.

Let us start with factor (1).

In the late 1960s, the US began dismantling its commodity buffer stock policies that had previously ensured price stability in the golden age of capitalism.

The prelude to stagflation was marked by a significant explosion in commodity prices that occurred in the second half of 1972. Part of the problem was the failure of the harvest in the old Soviet Union in 1972–1973 and the unexpectedly large purchases on world markets by the Soviet state (Kaldor 1976: 228). This could have been averted had the United States not dismantled its commodity buffer stock policies in the 1960s. As we have seen above, the end of Bretton Woods also induced commodity speculation and rises in commodity prices and raw materials costs.

This feed into further price rises, which in turn exacerbated wage–price spirals.

The final factor that explains the surge in inflation down to December 1974 was the first oil shock from October 1973, when various Middle Eastern producers of oil instituted an embargo that lasted until March 1974 (Kaldor 1976: 226). In most countries, the double digit inflation of the 1970s was caused by the oil shocks (both the first and second).

This explains why M2 growth rates, while high, actually fell gradually from January 1973 to June 1974 as a recession struck the US from November 1973 to March 1975. This inflation was a supply-side phenomenon.

The accelerating inflation rates from 1973 to 1974 occurred when the US economy was in recession and this anomaly puzzled many economists at that time.

The new portmanteau word “stagflation” (stagnation + inflation) was increasingly used to describe the phenomenon, which meant the simultaneous occurrence of stagnation or recession (with high unemployment) and accelerating inflation.

I have not bothered to continue this analysis down to 1980, but it could be easily done.

The very same factors as described above also explain the second bout of stagflation and the major cause was the Second oil shock.

Update
Philip Pilkington has a great post here on this very subject:

Philip Pilkington, “Animism and Monetarist Thinking: The Inflation in the US in the 1970s,” Fixing the Economists, August 6, 2013.

Further Links
“US Inflation Rates (1946–1987), Keynesianism and Stagflation,” March 24, 2013.

“Stagflation in the 1970s: A Post Keynesian Analysis,” June 24, 2011.

“Hans Albert on the Quantity Theory of Money,” March 2, 2014.

“Joan Robinson on the Quantity Theory of Money,” March 3, 2014.

“Endogenous Money: A Bibliography,” April 5, 2012.

“Endogenous Money 101,” April 20, 2013.

“Rochon and Rossi on the History of Endogenous Money,” May 4, 2013.

“Endogenous Money under the Gold Standard,” May 19, 2013.

“Some Empirical Evidence on Endogenous Money,” May 27, 2013.

“Empirical Evidence on Endogenous Money,” August 10, 2013.

“The Quantity Theory of Money is Wrong,” August 7, 2013.

BIBLIOGRAPHY
Davidson, Paul and Sidney Weintraub. 1973. “Money as Cause and Effect,” The Economic Journal 83.332: 1117–1132.

De Grauwe, P. and M. Polan. 2005. “Is Inflation Always and Everywhere a Monetary Phenomenon?,” Scandinavian Journal of Economics 107: 239–259.

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