What Firms' Surveys Tell Us about Price-Setting Behavior in the Euro Area

by Silvia Fabiani^a, Martine Druant^b, Ignacio Hernando^c, Claudia Kwapil^d, Bettina Landau^e, Claire Loupias^f, Fernando Martins^g, Thomas Mathä^h, Roberto Sabbatini^a, Harald Stahlⁱ and Ad Stokman^j

Abstract

This study investigates the pricing behavior of firms in the euro area on the basis of surveys conducted by nine Eurosystem national central banks, covering more than 11,000 firms. The results, consistent across countries, show that firms operate in monopolistically competitive markets, where prices are mostly set following markup rules and where price discrimination is common. Around one-third of firms follow mainly timedependent pricing rules, while two-thirds allow for elements of state dependence. The majority of the firms take into account both past and expected economic developments in their pricing decisions. Price reviews happen with a low frequency, of about one to three times per year in most countries, but prices are actually changed even less. Hence, price stickiness arises at both stages of the price-setting process and is mainly driven by customer relationships — explicit and implicit contracts — and coordination failure. Firms adjust prices asymmetrically in response to shocks: while cost shocks have a greater impact when prices have to be raised than when they have to be reduced, a fall in demand is more likely to induce a price change than an increase in demand.

JEL Codes: E30, D40.

 
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