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Competition and price adjustment in the euro area

Author

Listed:
  • Luis J. Álvarez

    (Banco de España)

  • Ignacio Hernando

    (Banco de España)

Abstract

This paper explores the role of a number of factors in explaining the heterogeneity in the degree of price stickiness across industries, on the basis of the information provided by surveys on pricing behavior conducted in nine euro area countries. The main focus is placed on the influence of competition on the degree of price flexibility. Our results suggest that the price setting strategies of the most competitive firms give them a greater capacity to react to shocks and make, in practice, for greater flexibility in their prices. The direct influence of market competition on price flexibility is corroborated by a cross-country cross-industry econometric analysis based on the information provided by surveys. This analysis also shows that the cost structure and demand conditions help to explain the degree of price flexibility. Finally, it suggests that countries in which product market regulation is more relevant are characterized by less price flexibility.

Suggested Citation

  • Luis J. Álvarez & Ignacio Hernando, 2006. "Competition and price adjustment in the euro area," Working Papers 0629, Banco de España.
    • Handle: RePEc:bde:wpaper:0629
    as

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    File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/06/Fic/dt0629e.pdf
    File Function: First version, October 2006
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    References listed on IDEAS

    as
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    4. Luis J. Álvarez & Emmanuel Dhyne & Marco Hoeberichts & Claudia Kwapil & Hervé Le Bihan & Patrick Lünnemann & Fernando Martins & Roberto Sabbatini & Harald Stahl & Philip Vermeulen & Jouko Vilmunen, 2006. "Sticky Prices in the Euro Area: A Summary of New Micro-Evidence," Journal of the European Economic Association, MIT Press, vol. 4(2-3), pages 575-584, 04-05.
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    6. K. C. Fung & Alicia Garcia‐Herrero & Hitomi Iizaka & Alan Siu, 2005. "Hard Or Soft? Institutional Reforms And Infrastructure Spending As Determinants Of Foreign Direct Investment In China," The Japanese Economic Review, Japanese Economic Association, vol. 56(4), pages 408-416, December.
    7. Enrique Alberola & Rodrigo César Salvado, 2006. "Banks, remittances and financial deepening in receiving countries. A model," Working Papers 0621, Banco de España.
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    9. Juan F. Jimeno & Esther Moral & Lorena Saiz, 2006. "Structural breaks in labor productivity growth: the United States vs. the European Union," Working Papers 0625, Banco de España.
    10. Josep M. Vilarrubia, 2006. "Neighborhood effects in economic growth," Working Papers 0627, Banco de España.
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    Citations

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    Cited by:

    1. Heiner Mikosch, 2012. "Sticky Prices, Competition and the Phillips Curve," KOF Working papers 11-294, KOF Swiss Economic Institute, ETH Zurich.
    2. Heiner Mikosch, 2013. "Der Zusammenhang zwischen Preisen, Kapazitätsauslastung und Wettbewerb," KOF Analysen, KOF Swiss Economic Institute, ETH Zurich, vol. 7(1), pages 91-103, March.
    3. Silvia Fabiani & Mario Porqueddu, 2015. "Changing prices ... changing times: evidence for Italy," Questioni di Economia e Finanza (Occasional Papers) 275, Bank of Italy, Economic Research and International Relations Area.
    4. Bartosz Mackowiak & Frank Smets, 2008. "On implications of micro price data for macro models," Conference Series ; [Proceedings], Federal Reserve Bank of Boston.
    5. Fernando Martins & M. Druant, 2009. "How are Firms’ Wages and Prices Linked: Survey Evidence in Europe," Working Papers w200918, Banco de Portugal, Economics and Research Department.
    6. Wioletta Dziuda & Giovanni Mastrobuoni, 2009. "The Euro Changeover and Its Effects on Price Transparency and Inflation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(1), pages 101-129, February.
    7. Philip Vermeulen & Daniel A. Dias & Maarten Dossche & Erwan Gautier & Ignacio Hernando & Roberto Sabbatini & Harald Stahl, 2012. "Price Setting in the Euro Area: Some Stylized Facts from Individual Producer Price Data," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(8), pages 1631-1650, December.
    8. Magdalena Borys & Roman Horváth & Michal Franta, 2009. "The effects of monetary policy in the Czech Republic: an empirical study," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 36(4), pages 419-443, November.
    9. Philip Vermeulen & Daniel A. Dias & Maarten Dossche & Erwan Gautier & Ignacio Hernando & Roberto Sabbatini & Harald Stahl, 2012. "Price Setting in the Euro Area: Some Stylized Facts from Individual Producer Price Data," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(8), pages 1631-1650, December.
    10. Watanabe, Makoto, 2008. "Inflation, price competition, and consumer search technology," Journal of Economic Dynamics and Control, Elsevier, vol. 32(12), pages 3780-3806, December.
    11. Aida Caldera Sánchez & Morten Rasmussen & Oliver Röhn, 2016. "Economic Resilience: What Role for Policies?," Journal of International Commerce, Economics and Policy (JICEP), World Scientific Publishing Co. Pte. Ltd., vol. 7(02), pages 1-44, June.
    12. Kujal Praveen & Ruiz Juan M., 2007. "Cost Effectiveness of R&D and Strategic Trade Policy," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 7(1), pages 1-35, April.
    13. Klenow, Peter J. & Malin, Benjamin A., 2010. "Microeconomic Evidence on Price-Setting," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 6, pages 231-284, Elsevier.
    14. Alvarez González, Luis Julián, 2008. "What Do Micro Price Data Tell Us on the Validity of the New Keynesian Phillips Curve?," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 2, pages 1-36.
    15. Jacques Pelkmans & Lourdes Acedo Montoya & Alessandro Maravalle, 2008. "How product market reforms lubricate shock adjustment in the euro area," European Economy - Economic Papers 2008 - 2015 341, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    16. Maravall, A. & del Rio, A., 2007. "Temporal aggregation, systematic sampling, and the Hodrick-Prescott filter," Computational Statistics & Data Analysis, Elsevier, vol. 52(2), pages 975-998, October.
    17. Druant, Martine & Fabiani, Silvia & Kezdi, Gabor & Lamo, Ana & Martins, Fernando & Sabbatini, Roberto, 2012. "Firms' price and wage adjustment in Europe: Survey evidence on nominal stickiness," Labour Economics, Elsevier, vol. 19(5), pages 772-782.
    18. Emmanuel Dhyne & Jerzy Konieczny & Fabio Rumler & Patrick Sevestre, 2009. "Price rigidity in the euro area - An assessment," European Economy - Economic Papers 2008 - 2015 380, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    19. Mamello A. Nchake & Lawrence Edwards & Asha Sundaram, 2018. "Price-setting Behavior and Competition in Developing Countries: an Analysis of Retail Outlets in Lesotho," Journal of Industry, Competition and Trade, Springer, vol. 18(4), pages 529-547, December.
    20. Fernando Martins, 2013. "Survey evidence on price and wage rigidities in Portugal," Working Papers w201312, Banco de Portugal, Economics and Research Department.
    21. Sylvain Benoît & Yannick Lucotte & Sébastien Ringuedé, 2019. "Competition and price stickiness: Evidence from the French retail gasoline market," Working Papers hal-02292332, HAL.
    22. Matsuoka, Takayasu, 2012. "Retail Price Stickiness, Market Structure and Distribution Channels," Research Center for Price Dynamics Working Paper Series 4, Research Center for Price Dynamics, Institute of Economic Research, Hitotsubashi University.
    23. Ricardo Gimeno & Juan M. Nave, 2006. "Genetic algorithm estimation of interest rate term structure," Working Papers 0634, Banco de España.

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    More about this item

    Keywords

    price setting; competition; survey data;
    All these keywords.

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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