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Pricing Behaviour and the Introduction of the Euro: Evidence from a Panel of Restaurants

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  • Gaiotti, Eugenio
  • Lippi, Francesco

Abstract

This paper assembles an original panel of data from 2,500 restaurants in Italy over the 1998-2004 period. The main objective is to study whether the euro cash changeover had an impact on individual pricing behaviour, as it seems to be perceived by consumers. Although the sample is not representative of the whole sector, our interest stems from the possibility of gaining deeper insights from individual data, as well as from the fact that restaurant prices were at the centre of the public discussion. First, the paper analyses the distribution of price changes in several years, to identify what features may contribute to explain the widespread perception of a large effect of the introduction of the euro on prices. Second, the paper discusses the economic mechanisms that may help explaining the impact of the cash changeover on prices. The data show that restaurant prices recorded sizeable increases in both 2001 and 2002 (around 10% and 9%, respectively). The cumulated increase in the price of a meal between 1998 and 2003 is substantial (the index rises by 40%). The changeover might have focused the public attention over this medium-run trend, prompting the attribution of the whole increase to the introduction of the euro. The analysis suggests that such increases reflect in part unfavourable developments on the costs side (strong increases in unit labour costs and fresh food inputs in both years) and strong increases in demand (especially in 2001). Part of the restaurant price increase recorded in 2002, however, does seem ascribable to the effect of the changeover. We find evidence consistent with a ‘menu-cost’ hypothesis for pricing behaviour: the rise in the average meal price is mainly due to a greater fraction of agents who revise their price, rather than to greater individual price revisions. Moreover, more market power (as proxied by a local concentration index) is associated with greater than average price increases during the changeover. A simple interpretation is proposed for this finding, which may also explain why the effects of the cash changeover may have been especially pronounced in this industry as opposed to more competitive ones.

Suggested Citation

  • Gaiotti, Eugenio & Lippi, Francesco, 2005. "Pricing Behaviour and the Introduction of the Euro: Evidence from a Panel of Restaurants," CEPR Discussion Papers 4893, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:4893
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    References listed on IDEAS

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    1. Michael Dotsey & Robert G. King & Alexander L. Wolman, 1999. "State-Dependent Pricing and the General Equilibrium Dynamics of Money and Output," The Quarterly Journal of Economics, Oxford University Press, vol. 114(2), pages 655-690.
    2. Bart Hobijn & Federico Ravenna & Andrea Tambalotti, 2006. "Menu Costs at Work: Restaurant Prices and the Introduction of the Euro," The Quarterly Journal of Economics, Oxford University Press, vol. 121(3), pages 1103-1131.
    3. Giancarlo Marini & Fabrizio Adriani & Pasquale Scaramozzino, 2003. "The Inflationary Consequences of a Currency Changeover: Evidence from the Michelin Red Guide," CEIS Research Paper 27, Tor Vergata University, CEIS.
    4. Fabiani, Silvia & Gattulli, Angela & Sabbatini, Roberto, 2004. "The pricing behaviour of Italian firms: new survey evidence on price stickiness," Working Paper Series 333, European Central Bank.
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    Cited by:

    1. Columba, Francesco, 2008. "The speed of euro adoption," Journal of International Money and Finance, Elsevier, vol. 27(2), pages 249-259, March.
    2. Denis Fougere & Erwan Gautier & Herve Le Bihan, 2010. "Restaurant Prices and the Minimum Wage," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(7), pages 1199-1234, October.
    3. Fabrizio Adriani & Giancarlo Marini & Pasquale Scaramozzino, 2009. "The Inflationary Consequences of a Currency Changeover on the Catering Sector: Evidence from the Michelin Red Guide," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 71(1), pages 111-133, February.
    4. Marco Ercolani, 2010. "Transitional price rises with the adoption of the euro: aggregate and disaggregate sector evidence," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 13(2), pages 137-157.
    5. Bart Hobijn & Federico Ravenna & Andrea Tambalotti, 2006. "Menu Costs at Work: Restaurant Prices and the Introduction of the Euro," The Quarterly Journal of Economics, Oxford University Press, vol. 121(3), pages 1103-1131.
    6. Fabiano Schivardi & Eliana Viviano, 2011. "Entry Barriers in Retail Trade," Economic Journal, Royal Economic Society, vol. 121(551), pages 145-170, March.
    7. Fabiano Schivardi & Eliana Viviano, 2007. "Entry barriers in Italian retail trade," Temi di discussione (Economic working papers) 616, Bank of Italy, Economic Research and International Relations Area.
    8. Francesco Columba, 2007. "Speed of euro adoption," 2007 Meeting Papers 350, Society for Economic Dynamics.
    9. Jérôme Accardo & Claire Célérier & Nicolas Herpin & Delphine Irac, 2011. "L'inflation perçue," Économie et Statistique, Programme National Persée, vol. 447(1), pages 3-31.
    10. Theodore Pelagidis & Taun Toay, 2007. "Expensive Living: The Greek Experience under the Euro," Intereconomics: Review of European Economic Policy, Springer;German National Library of Economics;Centre for European Policy Studies (CEPS), vol. 42(3), pages 167-176, May.
    11. Tairi Room & Katri Urke, 2014. "The Euro Changeover in Estonia: implications for inflation," Bank of Estonia Working Papers wp2014-6, Bank of Estonia, revised 10 Oct 2014.
    12. Ignazio Angeloni & Luc Aucremanne & Matteo Ciccarelli, 2006. "Price setting and inflation persistence: did EMU matter?," Economic Policy, CEPR;CES;MSH, vol. 21(46), pages 353-387, April.
    13. 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.
    14. Isabell Koske, 2011. "Price effects of the euro cash changeover: the role of product market competition," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 38(2), pages 223-230, May.
    15. Angelini, Paolo & Lippi, Francesco, 2005. "Did Inflation Really Soar After the Euro Cash Changeover? Indirect Evidence from ATM Withdrawals," CEPR Discussion Papers 4950, C.E.P.R. Discussion Papers.
    16. Marco G. Ercolani & Jayasri Dutta, 2006. "The Euro-changeoverand Euro-inflation: Evidence from Eurostat's HICP," Discussion Papers 06-03, Department of Economics, University of Birmingham.
    17. Ehrmann, Michael, 2006. "Rational inattention, inflation developments and perceptions after the euro cash changeover," Working Paper Series 588, European Central Bank.
    18. Paolo Angelini & Francesco Lippi, 2007. "Did Prices Really Soar after the Euro Cash Changeover? Evidence from ATM Withdrawals," International Journal of Central Banking, International Journal of Central Banking, vol. 3(4), pages 1-22, December.
    19. Stix, Helmut, 2009. "Perceived inflation and the euro: Evidence from an Austrian survey," European Journal of Political Economy, Elsevier, vol. 25(4), pages 547-561, December.
    20. Thomas A. Eife, 2006. "Price setting behaviour and price setting regulations at the euro changeover," Bank of Estonia Working Papers 2006-06, Bank of Estonia, revised 12 Oct 2006.
    21. Paolo Del Giovane & Roberto Sabbatini, 2006. "Perceived and Measured Inflation after the Launch of the Euro: Explaining the Gap in Italy," Giornale degli Economisti, GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, vol. 65(2), pages 155-192, November.
    22. Jaanika Merikull & Tairi Room, 2014. "One currency, one price? Euro Changeover related inflation in Estonia," Bank of Estonia Working Papers wp2014-7, Bank of Estonia, revised 10 Oct 2014.
    23. Felix Hüfner & Isabell Koske, 2008. "The Euro Changeover in the Slovak Republic: Implications for Inflation and Interest Rates," OECD Economics Department Working Papers 632, OECD Publishing.

    More about this item

    Keywords

    euro changeover; inflation; menu cost;

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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