How Do Firms Set Prices? Survey Evidence from Ireland

Abstract

Despite the importance of understanding and estimating the “stickiness” of prices of goods and services, empirical assessment of price setting behaviour by firms has remained relatively limited. This is the first paper to provide detailed information on the pressures, manner and frequency with which Irish firms adjust their output prices. Using survey information from almost a thousand Irish firms, we present a number of stylised facts on price setting behaviour. One of the first of these relates to the level of control firms have over their pricing strategy – the most common approach for firms is to set a price based on costs and a self-determined profit margin. However, one-third of firms said that their price was set primarily by following that of their closest competitors. The perceived intensity of competition was found to be one of the most significant factors in determining the price-setting approach and is also a central factor in determining price changes