The Pricing Behaviour of Firms in the Euro Area: New Survey Evidence

TLDR

The study investigates euro‑area firms’ pricing behaviour using surveys from nine Eurosystem national central banks covering over 11,000 firms. The authors analyze these survey responses to assess pricing rules and market structure. Firms operate in monopolistically competitive markets with markup pricing and price discrimination, use time‑dependent or state‑dependent rules, factor past and expected economic conditions, exhibit price stickiness driven by customer relationships and coordination failure, and adjust prices asymmetrically to shocks, with cost shocks more influential when raising prices and demand reductions more likely to trigger price changes than increases.

Abstract

This study investigates the pricing behaviour of firms in the euro area on the basis of surveys conducted by nine Eurosystem national central banks, covering more than 11,000 firms. The results, robust across countries, show that firms operate in monopolistically competitive markets, where prices are mostly set following markup rules and where price discrimination is common. Around one-third of firms follow mainly time-dependent pricing rules while two-thirds allow for elements of state-dependence. The majority of firms take into account past and expected economic developments in their pricing decisions. Price stickiness is mainly driven by customer relationships - explicit and implicit contracts - and coordination failure. Firms adjust prices asymmetrically in response to shocks: while cost shocks have a greater impact when prices have to be raised than when they have to be reduced, reductions in demand are more likely to induce a price change than increases in demand.