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Competition and price adjustment in the euro area

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  • 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.

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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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Bibliographic Info

Paper provided by Banco de Espa�a in its series Banco de Espa�a Working Papers with number 0629.

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Length: 27 pages
Date of creation: Oct 2006
Date of revision:
Handle: RePEc:bde:wpaper:0629

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Keywords: price setting; competition; survey data;

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References

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  1. Fung, K. C. & Garcia-Herrero, Alicia & Iizaka, Hitomi & Siu, Alan, 2005. "Hard or Soft? Institutional Reforms and Infrastructure Spending as Determinants of Foreign Direct Investment in China," Santa Cruz Department of Economics, Working Paper Series qt9377h519, Department of Economics, UC Santa Cruz.
  2. Arturo Galindo & Alejandro Izquierdo & José Manuel Montero, 2006. "Real Exchange Rates, Dollarization and Industrial Employment in Latin America," Research Department Publications, Inter-American Development Bank, Research Department 4478, Inter-American Development Bank, Research Department.
  3. Luis J. Álvarez & Pablo Burriel & Ignacio Hernando, 2005. "Price setting behaviour in Spain: evidence from micro PPI data," Banco de Espa�a Working Papers, Banco de Espa�a 0527, Banco de Espa�a.
  4. S. Fabiani & M. Druant & I. Hernando & C. Kwapil & B. Landau & C. Loupias & Fernando Martins & T. Mathä & R. Sabbatini & H. Stahl & A. Stokman, 2005. "The Pricing Behaviour of Firms in the Euro Area: New Survey Evidence," Working Papers, Banco de Portugal, Economics and Research Department w200510, Banco de Portugal, Economics and Research Department.
  5. Juan F. Jimeno & Esther Moral & Lorena Saiz, 2006. "Structural breaks in labor productivity growth: the United States vs. the European Union," Banco de Espa�a Working Papers, Banco de Espa�a 0625, Banco de Espa�a.
  6. Luis J. Álvarez & Ignacio Hernando, 2005. "The price setting behaviour of Spanish firms: evidence from survey data," Banco de Espa�a Working Papers, Banco de Espa�a 0537, Banco de Espa�a.
  7. Enrique Alberola & Rodrigo César Salvado, 2006. "Banks, remittances and financial deepening in receiving countries. A model," Banco de Espa�a Working Papers, Banco de Espa�a 0621, Banco de Espa�a.
  8. L. J. �lvarez & E. Dhyne & M. Hoeberichts & C. Kwapil & H. Le Bihan & P. L�nnemann & F. Martins & R. Sabbatini & H. Stahl & P. Vermeulen & J. Vilmunen, 2005. "Sticky Prices in the Euro Area: a Summary of New Micro Evidence," DNB Working Papers, Netherlands Central Bank, Research Department 062, Netherlands Central Bank, Research Department.
  9. Silvia Fabiani & Martine Druant & Ignacio Hernando & Claudia Kwapil & Bettina Landau & Claire Loupias & Fernando Martins & Thomas Mathä & Roberto Sabbatini & Harald Stahl & Ad Stokman, 2006. "What Firms' Surveys Tell Us about Price-Setting Behavior in the Euro Area," International Journal of Central Banking, International Journal of Central Banking, International Journal of Central Banking, vol. 2(3), September.
  10. Josep M. Vilarrubia, 2006. "Neighborhood effects in economic growth," Banco de Espa�a Working Papers, Banco de Espa�a 0627, Banco de Espa�a.
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