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Alessandro Barattieri (ESG UQAM)

21 May 2014 @ 12:45 - 13:45

 

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Details

Date:
21 May 2014
Time:
12:45 - 13:45
Event Category:

“Average-Cost Pricing: Some Evidence and Implications”

Abstract

We present new survey evidence on pricing behavior for more than 14,000 European firms, and study its macroeconomic implications.  Among firms that are price setters, roughly 75% respond that their prices are set as a markup on total costs, a business practice termed “full cost pricing”.  Only 25% set prices as markups over variable or marginal costs. Moreover, using industry data for the U.S., we find that the correlation between the changes in output prices and the changes in variable inputs prices is significantly lower when fixed costs are likely to be more important.
Since our results are similar to the findings in the classic and controversial paper of Hall and Hitch (1939) and subsequent survey evidence, we believe it worth studying the implications of full cost pricing for macroeconomics. In simple macro models, we find that full cost pricing raises the amplification and propagation of shocks, even in models without nominal rigidities. Finally, we show that average cost pricing need not be irrational, and propose a problem for the firm where full cost pricing can arise as optimizing behavior.