I Will Survive. Pricing Strategies of Financially Distressed Firms

39 Pages Posted: 25 Jun 2018

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: June 21, 2018

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 on their locked-in shoppers to maintain short-term profits at the expense of future market shares in times of low demand and vice versa in times of high demand. We extend this theoretical framework so that the countercyclical behaviour of price margins is strengthened by the expected persistence of demand 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.

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 (June 21, 2018). ECB Working Paper No. 2164. Available at SSRN: https://ssrn.com/abstract=3202090

Ioana Duca (Contact Author)

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

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

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