Synchronization of price changes within firms and industries : a micro-level analysis using PPI data

Abstract

Macroeconomic and monetary policy rely heavily on the assumption of price rigidity in the short run. In the literature there is broad consensus on the existence of such rigidities, but their origins remain to be fully understood. Our thesis contributes to this field of research, examining the pricing behavior of multiproduct firms in Norwegian product markets. Using a relatively unexplored dataset on Norwegian PPI data, we provide evidence on price rigidity at the producer level. We document that firm behavior to a certain extent depend on the number of products produced by a firm, a finding that is not accounted for in traditional macroeconomic models. Furthermore, we employ a multinomial logit model to examine synchronization of price changes, both within-firm and within-industry. We find strong evidence of within-firm synchronization. This synchronization is independent of the direction of the price changes, supporting the theory of economies of scope in menu costs. Moreover, we find some evidence of within-industry synchronization of price changes, indicating the presence of strategic complementarity in pricing decisions at the industry level. However, the industry synchronization effects are found to be small, suggesting that producers have a degree of pricing power, as they appear to be able to disregard competitor behavior to a certain extent. These findings shed light on the competitive environment in Norwegian product markets. Combined with earlier literature they have potentially important implications for the micro-foundations of macroeconomic models and monetary policy.