Saturday, April 19, 2014

Mark-up Pricing in Italy

Fabiani, Gattulli and Sabbatini (2004) report the results of a survey on price setting behaviour by Italian firms (see also Fabiani, Gattulli and Sabbatini 2007).

The survey was conducted in January 2003 and involved 333 industrial and service firms (Fabiani et al. 2004: 8), although about 66% were industrial firms. Furthermore, the survey was biased towards firms selling producer goods or wholesale goods (Fabiani et al. 2004: 13).

It was found that about 60% of firms review prices once a year, and around 50% only actually change prices once a year too (Fabiani et al. 2004: 21).

Firms were asked how their unit variable costs change when there is an increase in the level of production, and the following results were obtained:
Increasing costs | 48.5%

Unchanged/flat costs | 21.3%

Decreasing costs | 27.2%

N.A. 2.5%.
(Fabiani et al. 2004: 14).
So 48.5% of firms reported flat or decreasing unit variable costs: roughly half of firms surveyed.

The firms were asked how they set the price of their main product, and the following answers were obtained:
Mark-up on unit variable costs | 63.1%

Regulated price | 13.3%

Other | 7.3%

No Answer | 16.3%.
(Fabiani et al. 2004: 16).
Mark-up pricing emerges as the overwhelmingly important type of price setting behaviour. It is also interesting here to see that regulated prices only account for only 13.3% of prices, which is far lower than the percentage for mark-up pricing.

As I have argued here, it is a mistake to think from survey data like this that firms are only using unit variable costs to calculate their mark-up price. On the contrary, when firms are pressed on this issue and we look at all the other empirical evidence, it emerges that most mark-up pricing firms are using total average unit costs (including fixed/overhead costs).

Firms were also asked to assess the importance of various theories explaining price rigidity and the theories were ranked as follows from most important to least important:
(1) Co-ordination failure

(2) Temporary shocks

(3) Explicit contracts

(4) Pricing thresholds

(5) Menu costs

(6) Bureaucratic reasons.
(Fabiani et al. 2004: 25).
These results are in line with other national surveys, but the failure to include cost-based as a theory was a major oversight.

Firms were also asked if a rise/fall in demand was an important factor in causing price changes, but some 51.1% of firms said demand changes were either unimportant (13%) or of minor importance (38.1%) in driving price changes (Fabiani et al. 2004: 26). Only 34% of firms said demand was an important factor.

Most firms reported that cost shocks were the most important factor driving price changes (Fabiani et al. 2004: 27).

Finally, price changes tend to be asymmetric: cost shocks are more likely to raise prices than reduce them (that is, firms often do not decrease prices if costs fall), and demand changes, to the extent they influence prices, tend to cause price decreases rather than price increases (that is, firms generally do not adjust prices upwards when demand increases but might reduce them if demand falls) (Fabiani et al. 2004: 34).

Fabiani, Silvia, Gattulli, Angela, and Roberto Sabbatini. 2004. “The Pricing Behaviour of Italian Firms: New Survey Evidence on Price Stickiness,” ECB Working Paper Series No. 333

Fabiani, Silvia, Gattulli, Angela, and Roberto Sabbatini. 2007. “The Pricing Behaviour of Italian Firms: New Survey Evidence on Price Stickiness,” in S. Fabiani, C. Suzanne Loupias, F. M. Monteiro Martins and Roberto Sabbatini (eds.), Pricing Decisions in the Euro Area: How Firms set Prices and Why. Oxford University Press, New York. 110–123.

Friday, April 18, 2014

Did Kalecki Accept the Labour Theory of Value?

I thought that Kalecki did not accept the labour theory of value, but Matias Vernengo raises a question about this in a comment here, and asks for the evidence.

I have to admit to relying on memories of some reading on Kalecki quite a while ago, but some further research yields this interesting statement from the Polish Marxist economist Włodzimierz Brus, which seems to be from his personal conversations with Kalecki (who had
returned to Poland in 1955):
“While recognizing the enormous significance of the Marxist approach and of many Marxian tools of economic analysis, Kalecki never felt that he had to accept every component of Marxian economics or to retain those parts of it which have become obsolete in view of new experience and of the progress of economic theory. He felt, for example, a strong distaste for the Marxian theory of value, which he considered metaphysical and (if I am not mistaken) never wanted to discuss.” (Brus 1977: 59).
Of course, Brus might be mistaken, but other writers on Kalecki do seem to agree that Kalecki pretty much avoided the subject of the labour theory of value in his writings, and his silence suggests that he did not support it (Sawyer 1985: 148; Toporowski 2004: 217; Chapple 1983: 551; King 2001: 609; Chapple 2013: 302: “He had no time for the labor theory of value”) or (at least) had no interest in defending it:
“Kalecki seems never to have declared himself in print as to where he stood in relation to the labour theory of value. He assumed that prices were fixed by firms according to their unit costs of production to which margins or mark-ups were added to secure certain levels of profit.” (Harcourt and Hamouda 2003 [1988]: 219).
Brus, Włodzimierz. 1977. “Kalecki’s Economics of Socialism,” Oxford Bulletin of Economics and Statistics 39.1 (February): 57–67.

Chapple, Simon. 1994. “Kalecki’s Theory of the Business Cycle and the General Theory,” in John Cunningham Wood (ed.), John Maynard Keynes: Critical Assessments. Second Series. Croom Helm, London. 538–559.

Chapple, Simon. 2013. “Kalecki, Michał,” in Thomas Cate (ed.), An Encyclopedia of Keynesian Economics (2nd edn.). Cheltenham, Edward Elgar Pub. 301–304.

Hamouda, O. F. and G. C. Harcourt. 2003 [1988]. “Post-Keynesianism: From Criticism to Coherence?,” in Claudio Sardoni (ed.), On Political Economists and Modern Political Economy: Selected Essays of G. C. Harcourt. Routledge, London. 209–232.

King, John E. 2001. “Kalecki, Michał,” in Phillip Anthony O’Hara (ed.), Encyclopedia of Political Economy. Volume 1. A–K. Routledge, London and New York. 607-610.

Sawyer, Malcolm C. 1985. The Economics of Michał Kalecki. Macmillan, Basingstoke.

Toporowski, Jan. 2004. “Kalecki’s Arguments for Socialism,” in Zdzislaw L. Sadowski and Adam Szeworski (eds.), Kalecki’s Economics Today. Routledge, London and New York. 215–221.