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The Price Setting Behaviour of Portuguese Firms Evidence From Survey Data

By Fernando Martins

Abstract

This paper analyses the results of a survey conducted by the Banco de Portugal between May and September 2004 on a sample of 1370 Portuguese firms with the main purpose of investigating their price setting behaviour. The evidence points to the presence of a considerable degree of price stickiness: most firms do not review or change their prices more than once a year; time lags in price reactions to cost and demand shocks were found to be significant; and slightly more than half of the firms follow time-dependent price reviewing, though only one-third stick to this practice after the occurrence of specific shocks. The degree of price stickiness seems to be higher in services than in manufacturing. The presence of implicit contracts between firms and their customers under which the former pledge to stabilise their prices as a way to increase customers’ loyalty is apparently the main reason that prevents firms from changing their prices more promptly. Other relevant sources of price stickiness were also found: coordination problems arising from the preference of firms not to change their prices unless their competitors do so, the constraint imposed by a high proportion of fixed costs, marginal costs that vary little when costs are an important determinant in firms’ pricing decisions or the presence of formal contracts that are costly to renegotiate. In contrast, alternative explanations such as the existence of menu costs, the preference of firms to quote their prices according to certain thresholds and the costs of collecting the relevant information for pricing decisions were not considered very important.

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