New Survey Evidence on the Pricing Behaviour of Luxembourg Firms

45 Pages Posted: 5 May 2006

See all articles by Patrick Lunnemann

Patrick Lunnemann

Banque Central du Luxembourg

Thomas Y. Mathä

Banque centrale du Luxembourg

Date Written: May 2006

Abstract

This paper analyses the pricing behaviour of Luxembourg firms based on survey evidence. Luxembourg firms typically have low market share, many competitors and longstanding customer relationships. Price discrimination is frequently applied. A majority of firms use price review rules that include elements of state dependency. The median firm reviews and changes prices twice a year. The results suggest an almost equal share of firms applying forward-looking, backward-looking and rules of thumb behaviour. The adjustment speed is faster when cost goes up and demand goes down than in the opposite cases. The most relevant theories explaining price rigidity are implicit contracts, cost-based pricing and explicit contracts. Increases in labour and other costs are the most important factors leading to price increases; for price reductions it is price reductions by competitors followed by declining labour costs.

Keywords: Survey data, price setting, price rigidity, adjustment speed

JEL Classification: C21, C22, C14

Suggested Citation

Lunnemann, Patrick and Mathä, Thomas Y., New Survey Evidence on the Pricing Behaviour of Luxembourg Firms (May 2006). ECB Working Paper No. 617, Available at SSRN: https://ssrn.com/abstract=898129

Patrick Lunnemann (Contact Author)

Banque Central du Luxembourg ( email )

2, boulevard Royal
L-2983 Luxembourg
Luxembourg

Thomas Y. Mathä

Banque centrale du Luxembourg ( email )

2, bd Royal
L-2983 Luxembourg
Luxembourg
+352 4774 4270 (Phone)
+352 4774 4920 (Fax)

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