Link price setting behaviour with lumpy factor adjustments : A micro panel data analysis of Norwegian manufacturing firms

Abstract

This paper takes a descriptive approach to investigate the interrelation between price changes and factor demand based on the observation of rigidness in prices and lumpy adjustments of capital and labour stock. Based on empirical research, the assumptions that firms use markup pricing and compete in monopolistic markets, give reason to believe that firms will adjust their prices more than normally during episodes of large factor adjustments. Using micro panel data on Norwegian manufacture industries (VPPI), we find such a relationship to be weak or non-existing. The effect on price changes from labour adjustments are more present than from investments in capital. The results suggests that firms are operating in competitive markets where the prices are more dependent on other factors, such as their market share, than their cost of input factors.