How Do U.K. Companies Set Prices?

This paper reports the main results of a survey carried out by the Bank in the autumn of 1995 of the price-setting behaviour of 654 UK companies. It elaborates on an article in the May 1996 Bank of England Quarterly Bulletin. In the year preceding the survey, the average company reviewed its prices once a month. The extent and source of price rigidity varied across different types of company and market. Retailers reviewed and changed their prices more frequently than manufacturers. Companies operating in more competitive markets reviewed prices more often than companies with few direct competitors; but long-term relationships with customers appeared to reduce price flexibility. Despite the frequency of reviews, actual prices were only changed twice on average, indicating that there may be substantial costs of changing prices. Companies stated that the need to preserve customer relationships (due to explicit or implicit contractual arrangements) or to maintain market share were important sources of price rigidity. In addition, the overwhelming majority of companies indicated that they would be more likely to increase overtime and capacity than change their price in response to a boom in demand. There were substantial asymmetries in the factors which drive prices up and those that push prices down. Time-dependent pricing rules appeared to be much more widespread than state-dependent pricing rules, suggesting that the short-run real effects of monetary policy could increase at lower rates of inflation. Overall, the survey results indicate that UK markets do not behave as if prices are costlessly and instantaneously determined. It appears that uncertainty about the extent or permanence of changes in market conditions combined with costs of adjusting prices means that many companies' short-run response to a change in demand is to adjust output rather than price. Taking account of such behaviour could be important in explaining the short-run real effects of monetary policy.

[1]  Eytan Sheshinski,et al.  Optimum Pricing Policy under Stochastic Inflation , 1983 .

[2]  Stephen G. Cecchetti.  The frequency of price adjustment: A study of the newsstand prices of magazines , 1986 .

[3]  N. Mankiw,et al.  The New Keynesian Economics and the Output-Inflation Trade-Off , 1989 .

[4]  A. Kashyap,et al.  Sticky Prices: New Evidence from Retail Catalogs , 1994 .

[5]  Joseph E. Stiglitz,et al.  Price Rigidities and Market Structure , 1984 .

[6]  N. Gregory Mankiw,et al.  Small Menu Costs and Large Business Cycles: A Macroeconomic Model of Monopoly , 1985 .

[7]  Andrew Caplin,et al.  Menu Costs and the Neutrality of Money , 1987 .

[8]  D. Romer,et al.  Sticky Prices as Coordination Failure , 1987 .

[9]  A. Blinder.  Inventories and Sticky Prices: More on the Microfoundations of Macroeconomics , 1981 .

[10]  Eytan Sheshinski,et al.  Inflation and Costs of Price Adjustment , 1977 .

[11]  R. L. Hall,et al.  PRICE THEORY AND BUSINESS BEHAVIOUR , 1939 .

[12]  M. Friedman,et al.  A Monetary History of the United States , 1963 .

[13]  R. Hall.  Market Structure and Macroeconomic Fluctuations , 1987 .

[14]  Stanley Fischer,et al.  Long-Term Contracts, Rational Expectations, and the Optimal Money Supply Rule , 1977, Journal of Political Economy.

[15]  W. Nordhaus,et al.  Pricing in the Trade Cycle , 1972 .

[16]  G. Ackley.  The costs of inflation , 1979 .

[17]  Kornelius Kraft.  Determinants of price adjustment , 1995 .

[18]  O. Blanchard.  Why Does Money Affect Output? a Survey , 1987 .

[19]  Andrew John,et al.  Coordinating Coordination Failures in Keynesian Models , 1988 .

[20]  Janet L. Yellen,et al.  Can Small Deviations from Rationality Make Significant Differences to Economic Equilibria , 1985 .

[21]  Anthony D. Yates,et al.  Are There Downward Nominal Rigidities in Product Markets? , 1998 .

[22]  Frederic S. Lee.  From post-Keynesian to historical price theory, part I: facts, theory and empirically grounded pricing model ∗ , 1994 .

[23]  Clive Briault.  The Costs of Inflation , 1995 .

[24]  A. Haldane.  Targeting inflation : a conference of central banks on the use of inflation targets organised by the Bank of England 9-10 March 1995 , 1995 .

[25]  P. Geroski.  Price Dynamics in UK Manufacturing: A Microeconomic View , 1992 .

[26]  Olivier J. Blanchard,et al.  Price Asynchronization and Price Level Inertia , 1982 .

[27]  Rendigs Fels,et al.  A Monetary History of the United States, 1867-1960. , 1964 .

[28]  Joseph E. Stiglitz,et al.  THE CAUSES AND CONSEQUENCES OF THE DEPENDENCE OF QUALITY ON PRICE , 1987 .

[29]  D. Carlton,et al.  The Rigidity of Prices , 1986 .

[30]  James Peery Cover,et al.  Asymmetric Effects of Positive and Negative Money-Supply Shocks , 1992 .

[31]  William D. Nordhaus,et al.  Industrial Pricing in the United Kingdom , 1978 .

[32]  J. Bradford DeLong,et al.  How Does Macroeconomic Policy Affect Output , 1988 .

[33]  Ricardo J. Caballero,et al.  Dynamic (S,S) Economies , 1991 .

[34]  R. Gordon,et al.  Output Fluctuations and Gradual Price Adjustment , 1981 .

[35]  D. Romer,et al.  The Equilibrium and Optimal Timing of Price Changes , 1987 .

[36]  C. Weiß.  Price inertia and market structure: empirical evidence from Austrian manufacturing , 1993 .

[37]  G. Meredith,et al.  Asymmetric Effects of Economic Activityon Inflation , 1994 .

[38]  Garth Saloner,et al.  A Supergame-Theoretic Model of Price Wars during Booms , 1986 .

[39]  George J. Stigler,et al.  The Behavior of Industrial Prices , 1971 .

[40]  J. Haskel,et al.  Labour Market Flexibility and Employment Adjustment: Micro Evidence from UK Establishments , 1997 .

[41]  P. Sweezy.  Demand Under Conditions of Oligopoly , 1939, Journal of Political Economy.

[42]  Robert J. Barro,et al.  A Theory of Monopolistic Price Adjustment , 1972 .

[43]  G. Archibald,et al.  Pricing and employment in the trade cycle , 1963 .

[44]  M. Solá,et al.  A Reconsideration of the Empirical Evidence on the Asymmetric Effects of Money-Supply Shocks: Positive vs. Negative or Big vs. Small? , 1996 .

[45]  Janet L. Yellen,et al.  A Near-Rational Model of the Business Cycle , 1985 .

[46]  D. Kahneman,et al.  CHAPTER EIGHT. Fairness as a Constraint on Profit Seeking: Entitlements in the Market , 2004 .

[47]  Anthony D. Yates,et al.  What Determines the Short-run Output-Inflation Trade-off? , 1996 .

[48]  Bev Dahlby.  Price Adjustment in an Automobile Insurance Market: A Test of the Sheshinski-Weiss Model , 1992 .

[49]  Anil K. Kashyap.  Sticky Prices: New Evidence from Retail Catalogs , 1995 .

[50]  A. Haldane,et al.  Some Costs and Benefits of Price Stability in the United Kingdom , 1998 .