A sectoral analysis of price-setting behavior in US manufacturing industries

Leith, C. and Malley, J. (2007) A sectoral analysis of price-setting behavior in US manufacturing industries. Review of Economics and Statistics, 89, pp. 335-342. (doi:10.1162/rest.89.2.335)

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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-ofthumb. 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 backwardlooking fashion. Finally we find that firms in less competitive industries (characterized by higher average markup-ups) tend to adjust prices less frequently and are less likely to do so in a forward-looking manner.

Item Type:Articles
Status:Published
Refereed:Yes
Glasgow Author(s) Enlighten ID:Malley, Professor Jim and Leith, Professor Campbell
Authors: Leith, C., and Malley, J.
College/School:College of Social Sciences > Adam Smith Business School > Economics
Journal Name:Review of Economics and Statistics
Publisher:MIT Press
ISSN:0034-6535
ISSN (Online):1530-9142

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Project CodeAward NoProject NamePrincipal InvestigatorFunder's NameFunder RefLead Dept
388121Reinstating fiscal policy as a stabilisation deviceCampbell LeithEconomic & Social Research Council (ESRC)RES-156-25-0003Economics