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Price Setting Behaviour of Pakistani Firms: Evidence from Four Industrial Cities of Punjab

Author

Listed:
  • Wasim Shahid Malik

    (Quaid-i-Azam University, Islamabad.)

  • Ahsan ul Haq Satti

    (Quaid-i-Azam University, Islamabad.)

  • Ghulam Saghir

    (Pakistan Institute of Development Economics, Islamabad.)

Abstract
Since the introduction of rational expectations in the literature, most of the research focus in the area of macroeconomics has been investigating micro foundations of macroeconomic theory and transmission channels of policy. In 1990s, macroeconomists started working on macro models incorporating the assumption of nominal rigidity with explicit modeling of optimal behaviour of individuals and firms. More recently, these models gained empirical support by looking at both aggregate as well as at firm-level data. In this regard, limited studies are available that focus on developing countries. For Pakistan, there has been little focus on micro level studies in the field of macro or monetary economics, so our study attempts to fill this gap. Besides capturing price setting behaviour, the potential effects of changes in financial cost on the overall pricing and production decisions have also been investigated. It is important to note that this study is different from others throughout carried in different countries in the sense that instead of sending questionnaires by mail, data are collected by enumerators and field supervisors. It was found that Pakistani firms perceive to be in competitive environment they operate in. Most of the clients of the firms are regular and firms’ relationship with the customers is long-term. The large majority of firms use current information when reviewing prices. Around 70 percent of firms use either a state-dependent pricing rule or combination of both time-dependent and state-dependent rules. Pakistani firms revise and change their prices usually in the months of June and July. Moreover, costs of raw materials, cost of energy and inflation are the main determinants of price increase while the competitors’ price, raw materials costs and demand changes are responsible for price decrease. When it comes to the main causes of price stickiness, implicit contract with the customers is at the top, while explicit fixed term contract of prices on the second. Further it was observed that most of the firms change their wages once in a year. About half of the firms index their workers’ wages with inflation and past inflation rate is usually used for the purpose. Labour productivity and changes in inflation rate are found to be the main causes of wage change.

Suggested Citation

  • Wasim Shahid Malik & Ahsan ul Haq Satti & Ghulam Saghir, 2010. "Price Setting Behaviour of Pakistani Firms: Evidence from Four Industrial Cities of Punjab," PIDE-Working Papers 2010:65, Pakistan Institute of Development Economics.
    • Handle: RePEc:pid:wpaper:2010:65
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    1. Choudhary, M. Ali & Faheem, Abdul & Hanif, M. Nadim & Naeem, Saima & Pasha, Farooq, 2016. "Price setting & price stickiness: A developing economy perspective," Journal of Macroeconomics, Elsevier, vol. 48(C), pages 44-61.
    2. Choudhary, M. Ali & Naeem, Saima & Faheem, Abdul & Hanif, Nadim & Pasha, Farooq, 2011. "Formal sector price discoveries: preliminary results from a developing country," MPRA Paper 32368, University Library of Munich, Germany.
    3. M. Ali Choudhary & Saima Naeem & Abdul Faheem & Nadim Haneef & Farooq Pasha, 2011. "Formal Sector Price Discoveries: Results from a Developing Country," School of Economics Discussion Papers 1011, School of Economics, University of Surrey.

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    More about this item

    Keywords

    Price Setting Behaviour; Effectiveness of Monetary Policy; Wage and Price Contracts;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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