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The Pricing Behaviour of UK Firms

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  • Nicoletta Batini
  • Brian Jackson
  • Stephen Nickell

Abstract

Industrial prices of goods and services are a function of costs of production and of the mark-up that firms apply on those costs. If these prices relate to goods that are traded internationally, they will also be influenced by the price at which those goods are exchanged in international markets. In this paper we present two models of industry pricing behaviour and confront them with UK sectoral data, by estimating the theoretically derived pricing equations using an input-output table at basic prices prepared by Cambridge Econometrics and employment and wage data from the New Earnings Survey. The model based on Bils (1987) and Hall (1988) and which was originally devised for industries within the US manufacturing sector appears to fit the data only marginally better than the one which is based on a structural dynamic pricing equation from Batini, Jackson and Nickell (2000). In both models, sectoral domestic prices depend on marginal costs and sectoral world prices in domestic currency. We find that, in this respect, the weight attached to world prices is significantly correlated with the degree of openness of the industry.

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Bibliographic Info

Paper provided by Monetary Policy Committee Unit, Bank of England in its series Discussion Papers with number 09.

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Date of creation: 2002
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Handle: RePEc:mpc:wpaper:09

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  1. Waldmann, Robert J, 1991. "Implausible Results or Implausible Data? Anomalies in the Construction of Value-Added Data and Implications for Estimates of Price-Cost Markups," Journal of Political Economy, University of Chicago Press, vol. 99(6), pages 1315-28, December.
  2. Kollmann, Robert, 1997. "The cyclical behavior of mark ups in U.S. manufacturing and trade: new empirical evidence based on a model of optimal storage," Economics Letters, Elsevier, vol. 57(3), pages 331-337, December.
  3. Jose De Gregorio & Alberto Giovannini, 1993. "International Evidence on Tradables and Nontradable Inflation," NBER Working Papers 4438, National Bureau of Economic Research, Inc.
  4. Dornbusch, Rudiger, 1987. "Exchange Rates and Prices," American Economic Review, American Economic Association, vol. 77(1), pages 93-106, March.
  5. Erik Britton & Jens D J Larsen & Ian Small, 2000. "Imperfect competition and the dynamics of mark-ups," Bank of England working papers 110, Bank of England.
  6. Froot, Kenneth A & Klemperer, Paul D, 1989. "Exchange Rate Pass-Through When Market Share Matters," American Economic Review, American Economic Association, vol. 79(4), pages 637-54, September.
  7. Baumol, William J, 1982. "Contestable Markets: An Uprising in the Theory of Industry Structure," American Economic Review, American Economic Association, vol. 72(1), pages 1-15, March.
  8. Mark J. Roberts & Dylan Supina, 1997. "Output Price and Markup Dispersion in Micro Data: The Roles of Producer Heterogeneity and Noise," NBER Working Papers 6075, National Bureau of Economic Research, Inc.
  9. Haskel, Jonathan & Martin, Christopher & Small, Ian, 1995. "Price, Marginal Cost and the Business Cycle," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 57(1), pages 25-41, February.
  10. Robert E. Hall, 1988. "The Relation Between Price and Marginal Cost in U.S. Industry," NBER Working Papers 1785, National Bureau of Economic Research, Inc.
  11. Domowitz, Ian & Hubbard, R Glenn & Petersen, Bruce C, 1988. "Market Structure and Cyclical Fluctuations in U.S. Manufacturing," The Review of Economics and Statistics, MIT Press, vol. 70(1), pages 55-66, February.
  12. Bils, Mark, 1987. "The Cyclical Behavior of Marginal Cost and Price," American Economic Review, American Economic Association, vol. 77(5), pages 838-55, December.
  13. Bulow, Jeremy I & Geanakoplos, John D & Klemperer, Paul D, 1985. "Multimarket Oligopoly: Strategic Substitutes and Complements," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 488-511, June.
  14. Barron, John M & Bishop, John & Dunkelberg, William C, 1985. "Employer Search: The Interviewing and Hiring of New Employees," The Review of Economics and Statistics, MIT Press, vol. 67(1), pages 43-52, February.
  15. Nicoletta Batini & Brian Jackson & Stephen Nickell, 2000. "Inflation Dynamics and the Labour Share in the UK," Discussion Papers 02, Monetary Policy Committee Unit, Bank of England.
  16. Roberts, Mark J. & Supina, Dylan, 1996. "Output price, markups, and producer size," European Economic Review, Elsevier, vol. 40(3-5), pages 909-921, April.
  17. Ghosal, Vivek, 2000. "Product market competition and the industry price-cost markup fluctuations:: role of energy price and monetary changes," International Journal of Industrial Organization, Elsevier, vol. 18(3), pages 415-444, April.
  18. Matthew D. Shapiro, 1987. "Measuring Market Power in U.S. Industry," Cowles Foundation Discussion Papers 828, Cowles Foundation for Research in Economics, Yale University.
  19. Evenden, Rhys D. & Williams, Alan W., 2000. "Contestability: The Debate and Industry Policy," Economic Analysis and Policy (EAP), Queensland University of Technology (QUT), School of Economics and Finance, vol. 30(1), pages 75-90, March.
  20. Geroski, P A, 1992. "Price Dynamics in UK Manufacturing: A Microeconomic View," Economica, London School of Economics and Political Science, vol. 59(236), pages 403-19, November.
  21. Geroski, P A & Hall, S G, 1995. "Price and Quantity Responses to Cost and Demand Shocks," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 57(2), pages 185-204, May.
  22. J. Bradford DeLong & Robert J. Waldmann, 1997. "Interpreting procyclical productivity: evidence from a cross-nation cross-industry panel," Economic Review, Federal Reserve Bank of San Francisco, pages 33-52.
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Cited by:
  1. Gabriella Legrenzi & Costas Milas, 2004. "Non-linear real exchange rate effects in the UK labour market," International Finance 0411007, EconWPA.
  2. Nicoletta Batini, 2006. "Euro area inflation persistence," Empirical Economics, Springer, vol. 31(4), pages 977-1002, November.
  3. Morten Spange & Pawel Zabczyk, 2006. "Sterling implications of a US current account reversal," Bank of England working papers 296, Bank of England.

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