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The impact of price competitiveness on UK producer price behaviour

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  • Colin Ellis
  • Simon Price

Abstract

Modern open-economy macro models emphasise pricing-to-market behaviour. It is possible that domestic pricing behaviour might be affected by import (competitors') prices, and this is a commonly used variable in empirical work on pricing. But there is theoretical ambiguity and a potential identification problem. Cointegrating techniques are used in an attempt to resolve this, using the most appropriate data set (producer prices). Some evidence is found for the existence of two long-run relationships. The first of these is interpretable as a price mark-up or factor demand relationship, and competitors' prices can be excluded from it. The second equation can be interpreted as a long-run equilibrium price relationship equating domestic and foreign prices. This raises the possibility that single-equation estimates indicating a role for foreign prices in domestic price determination may mislead. However, the results are for producer prices and may not necessarily be extended to other indices.

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Bibliographic Info

Paper provided by Bank of England in its series Bank of England working papers with number 178.

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Date of creation: Mar 2003
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Handle: RePEc:boe:boeewp:178

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Cited by:
  1. Colin Ellis, 2006. "Elasticities, markups and technical progress: evidence from a state-space approach," Bank of England working papers 300, Bank of England.

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