Competition and price adjustment in the euro area

Luis Alvarez and Ignacio Hernando

No 629, Working Papers from Banco de España

Abstract: This paper explores the role of a number of factors in explaining the heterogeneity in the degree of price stickiness across industries, on the basis of the information provided by surveys on pricing behavior conducted in nine euro area countries. The main focus is placed on the influence of competition on the degree of price flexibility. Our results suggest that the price setting strategies of the most competitive firms give them a greater capacity to react to shocks and make, in practice, for greater flexibility in their prices. The direct influence of market competition on price flexibility is corroborated by a cross-country cross-industry econometric analysis based on the information provided by surveys. This analysis also shows that the cost structure and demand conditions help to explain the degree of price flexibility. Finally, it suggests that countries in which product market regulation is more relevant are characterized by less price flexibility.

Keywords: price setting; competition; survey data (search for similar items in EconPapers)
JEL-codes: D40 E31 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2006-10
New Economics Papers: this item is included in nep-com, nep-cse, nep-eec, nep-mac and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (29)

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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:0629

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