Price Setting and Market Structure: An Empirical Analysis of Micro Data

37 Pages Posted: 8 Dec 2008

See all articles by Fabrizio Coricelli

Fabrizio Coricelli

University of Siena - Department of Political and International Sciences ; Paris School of Economics (PSE); Centre for Economic Policy Research (CEPR)

Roman Horvath

Charles University in Prague; IOS Regensburg; Université de Nice Sophia Antipolis - Groupe de Recherche en Droit, Economie et Gestion (GREDEG); University of Saint Etienne - Analysis Group and Economic Theory Lyon St-Etienne (GATE-LSE)

Date Written: September 5, 2008

Abstract

Most empirical studies on price setting that use micro data focus on advanced industrial countries. In this paper we analyze the experience of an emerging economy, Slovakia, using a large micro-level dataset that accounts for a substantial part of the consumer price index (about 5 million observations). We find that market structure is an important determinant of pricing behavior. The effect of market structure on persistence of inflation results from two conflicting forces. Increased competition may reduce persistence by increasing the frequency of price changes. In contrast, higher competition may increase persistence through inertial behaviour induced by the strategic complementarity among price setters. In our case study, we find that the latter effects dominate. Indeed, the dispersion of prices is higher while persistence is lower in the non-tradeable sectors, suggesting that higher competition is not conducive to lower persistence. Furthermore, we find that the frequency of price changes depends negatively on the price dispersion and positively on the product-specific inflation. These results seem consistent with predictions of Calvo's staggered price model.

Keywords: price setting, market structure, emerging markets

JEL Classification: D40, E31

Suggested Citation

Coricelli, Fabrizio and Horvath, Roman, Price Setting and Market Structure: An Empirical Analysis of Micro Data (September 5, 2008). William Davidson Institute Working Paper No. 938, Available at SSRN: https://ssrn.com/abstract=1311914 or http://dx.doi.org/10.2139/ssrn.1311914

Fabrizio Coricelli

University of Siena - Department of Political and International Sciences ( email )

Via Mattioli, 10
Siena, 53100
Italy

Paris School of Economics (PSE)

48 Boulevard Jourdan
Paris, 75014 75014
France

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Roman Horvath (Contact Author)

Charles University in Prague ( email )

Celetná 13
Praha 1, 116 36
Czech Republic

IOS Regensburg

Landshuter Str. 4
Regensburg, 93047
Germany

Université de Nice Sophia Antipolis - Groupe de Recherche en Droit, Economie et Gestion (GREDEG)

250, rue Albert Einstein
Valbonne, 06560
France

University of Saint Etienne - Analysis Group and Economic Theory Lyon St-Etienne (GATE-LSE)

Lyon
France

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