The Price Setting Behaviour of Portuguese Firms: Evidence from Survey Data

Abstract

This paper analyses the results of a survey conducted by the Banco de Portugal with the main purpose of investigating firms' price setting behaviour. The evidence points to the presence of a considerable degree of price stickiness, which seems to be higher in services than in manufacturing. The presence of implicit contracts between firms and their customers under which the former pledge to stabilise their prices as a way to increase customers' loyalty is apparently the main reason that prevents firms from changing their prices more promptly. Other relevant sources of price stickiness were also found: coordination problems arising from the preference of firms not to change their prices unless their competitors do so, the constraint imposed by a high share of fixed costs, marginal costs that vary little when costs are an important determinant in pricing decisions or the presence of formal contracts that are costly to renegotiate.

Keywords: Inflation persistence, price-setting behaviour and survey data

JEL Classification: E31, D40, L11