How Rigid Are Producer Prices?

How rigid are producer prices? Conventional wisdom is that producer prices are more rigid than and so play less of an allocative role than do consumer prices. In the 1987-2008 micro data collected by the U.S. Bureau of Labor Statistics for the PPI, we find that producer prices for finished goods and services in fact exhibit roughly the same rigidity as do consumer prices that include sales, and substantially less rigidity than do consumer prices that exclude sales. Large firms change prices two to three times more frequently than do small firms, and by smaller amounts, particularly for price decreases. Longer price durations are associated with larger price changes, though there is considerable heterogeneity in this relationship. Long-term contracts are associated with somewhat greater price rigidity for goods and services, though the differences are not dramatic. The size of price decreases plays a key role in inflation dynamics, while the size of price increases does not. The frequencies of price increases and decreases tend to move together, and so cancel one another out.Producer prices, consmer prices, contracts

Sticky prices: why firms hesitate to adjust the price of their goods

Price stickiness—the tendency of prices to remain constant despite changes in supply and demand—has been linked to firms’ unwillingness to pay the costs entailed in setting, implementing, and advertising new prices. However, there is little consensus on the size and importance of these “repricing costs.” Taking the imported beer market as their subject, the authors of this study find repricing costs to be markedly higher for manufacturers than for retailers and conclude that, at the wholesale level, these costs are a significant deterrent to price adjustment.Prices ; Supply and demand ; Beer industry

Market Integration and Convergence to the Law of One Price: Evidence from the European Car Market

This paper exploits the unique experiment of European market integration to investigate the relationship between integration and price convergence in international markets. Using a panel data set of car prices we examine how the process of integration has affected cross-country price dispersion in Europe. We find surprisingly strong evidence of convergence towards both the absolute and the relative versions of Purchasing Power Parity. Our analysis illuminates the main sources of segmentation in international markets and suggests the type of institutional changes that can successfully reduce it.

A Structural Approach to Identifying the Sources of Local-Currency Price Stability

The inertia of the local-currency prices of traded goods in the face of exchange-rate changes is a well-documented phenomenon in International Economics. This paper develops a structural model to identify the sources of this local-currency price stability and applies it to micro data from the beer market. The empirical procedure exploits manufacturers’ and retailers’ first-order conditions in conjunction with detailed information on the frequency of price adjustments following exchange-rate changes to quantify the relative importance of local non-traded cost components, markup adjustment by manufacturers and retailers, and nominal price rigidities in the incomplete transmission of such changes to prices. We find that, on average, approximately 60% of the incomplete exchange rate pass-through is due to local non-traded costs; 8% to markup adjustment; 30% to the existence of own-brand price adjustment costs, and 1% to the indirect/strategic effect of such costs, though these results vary considerably across individual brands according to their market shares.

A Framework for Identifying the Sources of Local-Currency Price Stability with an Empirical Application

The inertia of the local-currency prices of traded goods in the face of exchange-rate changes is a well-documented phenomenon in International Economics. This paper develops a framework for identifying the sources of local-currency price stability. The empirical approach exploits manufacturers’ and retailers’ first-order conditions in conjunction with detailed information on the frequency of price adjustments in response to exchange-rate changes, in order to quantify the relative importance of markup adjustment by manufacturers and retailers, local-cost non-traded components, and nominal price rigidities, in the incomplete transmission of exchange-rate changes to prices. The approach is applied to micro data from the beer market. We find that on average, 54.1% of the incomplete exchange rate pass-through is due to local non-traded costs; 33.7% to markup adjustment; and 12.2% to the existence of price adjustment costs.currency prices, exchange rates

Distributional Effects of Globalization in Developing Countries

We discuss recent empirical research on how globalization has affected income inequality in developing countries. We begin with a discussion of conceptual issues regarding the measurement of globalization and inequality. Next, we present empirical evidence on the evolution of globalization and inequality in several developing countries during the 1980s and 1990s. We then examine the channels through which globalization may have affected inequality discussing theory and evidence in parellel. We conclude with directions for future research.

Trade, Inequality, and Poverty: What Do We Know? Evidence from Recent Trade Liberalization Episodes in Developing Countries

We review the empirical evidence on the relationship between Trade Liberalization, Inequality, and Poverty based on the analysis of micro data from several developing countries that underwent significant trade reforms in recent years. Despite many measurement and identification difficulties, and despite conflicting evidence on some issues, empirical work based on country case studies' has established certain patterns that seem common across countries and trade liberalization episodes, and may hence be informative as to how developing countries adjust to trade reform.

The Response of the Informal Sector to Trade Liberalization

This paper studies the relationship between trade liberalization and informality. It is often claimed that increased foreign competition in developing countries leads to an expansion of the informal sector, defined as the sector that does not comply with labor market legislation. Using data from two countries that experienced large trade barrier reductions in the 1980's and 1990's, Brazil and Colombia, we examine the response of the informal sector to liberalization. In Brazil, we find no evidence of a relationship between trade policy and informality. In Colombia, we do find evidence of such a relationship, but only for the period preceding a major labor market reform that increased the flexibility of the Colombian labor market. These results point to the significance of labor market institutions in assessing the effects of trade policy on the labor market.

The Evolution of Price Discrimination in the European Car Market

Car prices in Europe are characterized by large and persistent differences across countries. The purpose of this paper is to document and explain this price dispersion. Using a panel data set extending from 1980 to 1993, we first demonstrate two main facts concerning car prices in Europe: (1) The existence of significant differences in quality adjusted prices across countries, with Italy and the U. K. systematically representing the most expensive markets. (2) Substantial year-to-year volatility that is to a large extent accounted for by exchange rate fluctuations and the incomplete response of local currency prices to these fluctuations. These facts are analyzed within the framework of a multiproduct oligopoly model with product differentiation. The model identifies three potential sources for the international price differences: price elasticities generating differences in markups, costs, and import quota constraints. Local currency price stability can be attributed either to the presence of a local component in marginal costs, or to markup adjustment that is correlated with exchange rate volatility; the latter requires that the perceived elasticity of demand is increasing in price. We find that the primary reason for the higher prices in Italy is the existence of a strong bias for domestic brands that generates high markups for the domestic firm (Fiat). In the U. K. higher prices are mainly attributed to better equipped cars and/or differences in the dealer discount practices. The import quota constraints are found to have a significant impact on Japanese car prices in Italy, France and the U. K.. With respect to local currency price stability, 2/3 of the documented price inertia are attributed to local costs, and 1/3 to markup adjustment that is indicative of price discrimination. Based on these results we conjecture that the EMU will substantially reduce the year-to-year volatility observed in the car price data, but without further measures to increase European integration, it will not completely eliminate existing cross-country price differences. ZUSAMMENFASSUNG - (Die Entwicklung der Preisdiskriminierung im europäischen Automobilmarkt) Die Autopreise in Europa sind durch große und beständige Unterschiede zwischen Ländern gekennzeichnet. Ziel dieses Beitrages ist es, diese Preisstreuung zu erklären. Anhand eines Paneldatensatzes für den Zeitraum von 1980 bis 1993 wird erstens aufgezeigt, daß signifikante Unterschiede in qualitätsangepaßten Peisen zwischen den Ländern bestehen, wobei Italien und Großbritannien die teuersten Märkte aufweisen. Zweitens lassen sich beträchtliche Schwankungen von Jahr zu Jahr feststellen, die vor allem auf Wechselkursveränderungen und unvollständige Reaktionen bei der lokalen Preissetzung zurückzuführen sind. Diese Sachverhalte werden im Rahmen eines Mehr-produkt-Oligopol-Modells mit Produktdifferenzierung analysiert. Das Modell identifiziert drei potentielle Quellen für internationale Preisunterschiede: Preiselastizitäten, die unterschiedliche Gewinnspannen erzeugen, Kosten- und Importquotenbeschränkungen. Inwieweit diese Ursachen im einzelnen zutreffen, wird für die verschiedenen Länder ausführlich erörtert. Insgesamt lassen die Ergebnisse darauf schließen, daß sich im Gefolge der europäischen Währungsunion die von Jahr zu Jahr zu beobachtenden Schwankungen der Automobilpreise verringern dürften; sie verdeutlichen aber auch, daß ohne weitere Maßnahmen in Richtung europäische Integration die existierenden Preisunterschiede zwischen den einzelnen Ländern nicht vollständig verschwinden werden.