Competition and Price Adjustment in the Euro Area

27 Pages Posted: 31 Oct 2006

Date Written: October 30, 2006

Abstract

This paper explores the role of a number of factors in explaining the heterogeneity in the degree of price stickiness across industries, on the basis of the information provided by surveys on pricing behavior conducted in nine euro area countries. The main focus is placed on the influence of competition on the degree of price flexibility. Our results suggest that the price setting strategies of the most competitive firms give them a greater capacity to react to shocks and make, in practice, for greater flexibility in their prices. The direct influence of market competition on price flexibility is corroborated by a cross-country cross-industry econometric analysis based on the information provided by surveys. This analysis also shows that the cost structure and demand conditions help to explain the degree of price flexibility. Finally, it suggests that countries in which product market regulation is more relevant are characterized by less price flexibility.

Keywords: price setting, competition, survey data

JEL Classification: D40, E31

Suggested Citation

Álvarez, Luis J. and Hernando, Ignacio, Competition and Price Adjustment in the Euro Area (October 30, 2006). Banco de Espana Research Paper No. WP-0629. Available at SSRN: https://ssrn.com/abstract=941317 or http://dx.doi.org/10.2139/ssrn.941317

Luis J. Álvarez (Contact Author)

Banco de España ( email )

Madrid 28014
Spain

Ignacio Hernando

Banco de España ( email )

Madrid 28014
Spain
+34 91 338 5186 (Phone)
+34 91 338 5678 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
92
Abstract Views
665
rank
281,937
PlumX Metrics