A Sectoral Analysis of Price-Setting Behavior in Us Manufacturing Industries

36 Pages Posted: 21 Aug 2003

See all articles by Campbell Leith

Campbell Leith

University of Glasgow - Department of Economics

Jim Malley

University of Glasgow - Department of Economics

Date Written: July 2003

Abstract

In this paper we develop a multi-sector model of firms' pricing behaviour under imperfect competition. We allow for the fact that some goods sold will be for final consumption, while others will be used as intermediate goods in further production. We assume that price setters are constrained by the existence of Calvo (1983) contracts which enables us to measure the extent of price inertia across industrial sectors. We further allow for the possibility that some firms set prices to maximise the discounted value of profits, while others set prices according to a backward-looking rule-of-thumb. We then estimate the resulting price-setting equations for 18 US manufacturing industries defined at the SIC 2-digit level over the period 1959 to 1996. We find that there is statistically significant variability in estimates of price stickiness, ranging from 4 months to almost 1.5 years with significantly more inertia in the setting of durable goods prices. We also find that estimates of backward-looking price-setting behaviour vary, with some industries acting in a purely forward-looking manner, while others are characterized by almost 50 per cent of firms setting prices in a backward-looking fashion. Finally we find that firms in less competitive industries (characterized by higher average mark-ups) tend to adjust prices less frequently and are less likely to do so in a forward-looking manner.

JEL Classification: E3

Suggested Citation

Leith, Campbell and Malley, Jim, A Sectoral Analysis of Price-Setting Behavior in Us Manufacturing Industries (July 2003). Available at SSRN: https://ssrn.com/abstract=429960 or http://dx.doi.org/10.2139/ssrn.429960

Campbell Leith

University of Glasgow - Department of Economics ( email )

Adam Smith Building
Glasgow, Scotland G12 8RT
United Kingdom
++44 141 330 3702 (Phone)
++44 141 330 4940 (Fax)

Jim Malley (Contact Author)

University of Glasgow - Department of Economics ( email )

Adam Smith Building
Glasgow, Scotland G12 8RT
United Kingdom
+44 141 330 4617 (Phone)
+44 141 330 4940 (Fax)

HOME PAGE: http://www.gla.ac.uk/economics/malley/

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