Price setting behavior of firms in Pakistan

We study the price setting behavior of firms in Pakistan on the basis of a national survey of 1237 firms. We study the firms’ behavior for 2019, following a period of relative inflation stability, and contrast it with the result from an almost identical survey taken in 2009, following a period of extreme volatility. The survey shows that firms review and adjust prices less frequently in 2019. Percentage of firms doing monthly price reviews has come down from 73% to 25% and subsequently, we see a reduction in median frequency of price change from 3 to 1 per year. Furthermore, the use of time-dependent rules of price reviews has also decreased by firms. In terms of market environment, we see a reduction in perceived competition and an increase in long-term customers. Another important result is that despite increased rigidity, the pass-through of shocks have become faster. This indicates that firms have become more proactive in their response to possible shocks in the economy. Moreover, the asymmetric reaction of firms in response to ER shocks also points towards the persistency in inflation induced by ER depreciation. In terms of different theories of price stickiness, coordination failure and temporary shocks are still the most cited theories by firms for not changing the prices. Additionally, the survey finds that while the informal sector is growing in Pakistan, its impact on price rigidity has decreased significantly.