MMP II - lecture 4

Modern Monetary Policy II
Lecture 4: Introduction to pricing mechanisms and
causes of price rigidity
Szymon Wójcik
Institute of Econometrics, University of Lodz
November 9, 2015
Some important facts to begin with:
• Firms maximize interest in infinite horizon
• Market has a structure of monopolistic
competition
• Firms are responsible for setting prices
• There are different pricing mechanisms
– today we will talk about some of them 
Why do firms leave prices unchanged?
1. Cost-based pricing
2. Explicit contracts
3. Implicit contracts
4. Coordination failure
5. Menu costs
Why do firms leave prices unchanged?
6. Costly information
7. Temporary shocks
8. Change of non-price factors
9. Judging quality by price
10. Pricing thresholds
Evidence from Blinder’s (1991) study
Evidence from Poland
• Jankiewicz, Kołodziejczyk (2008)
How often are the prices analysed?
Sectoral differences (price analysis)
How often are the prices changed?
Sectoral differences (price changes)
Price analysis vs price changes
Why do firms leave prices unchanged?
What prevents firms from changing prices?
Why do firms actually change their prices?
Conclusions
• There are similarities between Polish and euro
area firms behaviour.
• Main reason of price adjustment is cost.
• Second reason - co-ordination failure.
• Price rigidity is smaller in Poland than in euro
area.
• Price rigidity in Poland rises.
• Big firms revise prices more often than small
ones.
Conclusions (cont.)
• In Poland and in euro area price changes are
less often than price analysis.
• The major reasons of rising prices of products
were risings of basic resources and
components.
• The major reasons of keeping price unchanged
were: fear that other firms won’t change their
prices, explicit contracts.
Literature
• Baranowski P., Problem optymalnej stopy inflacji w modelowaniu wzrostu
gospodarczego, wyd. Biblioteka, Łódź, 2008.
• Baranowski P., Gałecka-Burdziak E., Górajski M., Malaczewski M.,
Szafrański G., Inflacja a mechanizmy aktualizacji cen. Studium dla Polski,
Państwowe Wydawnictwo Naukowe, Łódź, 2013.
• Blinder A., Why Prices Are Sticky? Preliminary Results from an Interview
Study, “American Economic Review”, vol. 81, no. 2, 1991.
• Fabiani S., Druant M., Hernando I., Kwapil C., Landau B., Loupias C.,
Martins F., Mathä T., Sabbatini R., Stahl H., Stokman A., The Pricing
Behavior of Firms in the Euro Area: New Survey Evidence, “ECB Working
Paper”, no. 535, 2005.
• Jankiewicz Z., Kołodziejczyk D., Mechanizmy kształtowania cen w
przedsiębiorstwach polskich na tle zachowań firm ze strefy euro, „Bank i
kredyt”, vol. 39, nr 2, 2008.
• Taylor J. B., Aggregate Dynamics and Staggered Contracts, “Journal of
Political Economy”, vol. 88, no. 1, 1980.
Thank you for your attention 