I Will Survive. Pricing Strategies of Financially Distressed Firms

51 Pages Posted: 21 Apr 2017

See all articles by Ioana Duca

Ioana Duca

European Central Bank (ECB)

Jose Manuel Montero

Banco de España

Marianna Riggi

Bank of Italy

Roberta Zizza

Bank of Italy

Multiple version iconThere are 2 versions of this paper

Date Written: March 28, 2017

Abstract

We consider a standard result of customer market theory: if firms have stable customer relations and face financial frictions, they may keep prices relatively high in times of low demand and vice versa. Indeed, during recessions, when firms have low cash flow and greater difficulty in raising external funds, they may set higher prices on their locked-in shoppers to maintain short-term profits at the expense of future market shares. We extend this theoretical framework so that the countercyclical behaviour of price margins is strengthened by the expected persistence of the downturn and the procyclicality of competitive pressures. We test these predictions for Italian firms participating in the 2014 Wage Dynamics Network Survey. All things being equal, financially constrained firms charge higher markups when faced with low demand; this behaviour is more evident when demand is perceived as being persistent. Our findings suggest that the severity of financial constraints in Italy was one of the causes of the sustained growth of prices in 2010-2013, notwithstanding the considerable slack in the economy.

Keywords: markups, financial frictions, customer market

JEL Classification: C25, C26, D22, L11

Suggested Citation

Duca, Ioana and Montero, Jose Manuel and Riggi, Marianna and Zizza, Roberta, I Will Survive. Pricing Strategies of Financially Distressed Firms (March 28, 2017). Bank of Italy Temi di Discussione (Working Paper) No. 1106. Available at SSRN: https://ssrn.com/abstract=2956303 or http://dx.doi.org/10.2139/ssrn.2956303

Ioana Duca

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Jose Manuel Montero

Banco de España ( email )

Madrid 28014
Spain

Marianna Riggi

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

Roberta Zizza (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

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