Price‐Setting Behavior of Korean Firms†

DOIhttp://doi.org/10.1111/asej.12197
AuthorSungJu Song,Chang‐Gui Park,Myung‐Soo Yie
Date01 March 2020
Published date01 March 2020
Price-Setting Behavior of Korean Firms
SungJu Song, Myung-Soo Yie and Chang-Gui Park
Received 26 February 2019; Accepted 20 March 2020
This paper investigates a pattern of price revision by rms in Korea and sheds
light on the cause of price stickiness by providing reliable statistical estimates for
calibration of the parameters of the widely-used macro-models. Based on rm-
level survey data and using a probit model, we identify the rm characteristics or
market conditions that discourage rms from carrying out state-dependent price
adjustment. We also estimate the factors driving rms to engage in state-
dependent adjustment rather than wait until the next scheduled revision under
three different shocks: demand, general cost and exchange rate shocks. We nd a
few interesting features, as follows. First, price revision by Korean rms tends to
be time-dependent rather than state-dependent, with a sizable dispersion across
sectors and rm sizes. Second, the pattern of price revision in Korea is not signi-
cantly different from that in selected advanced economies. Third, the reason why
rms favor time-dependent price adjustments appears to be endogenous,
accounted for by a number of market institution variables. Fourth, in response to
shocks, Korean rms tend to wait until the next periodically scheduled revision
rather than make a state-dependent price adjustment, unless marginal costs are
affected signicantly by the shock, and state-dependent revisions are often signi-
cantly delayed when they do occur.
Keywords: rm-level price, revision of price quotes, revision frequency.
JEL classication codes: E31, D30.
doi: 10.1111/asej.12197
I. Introduction
The problem of how to characterize various pricing behaviors of heterogeneous
rms is one of the fundamental issues that macroeconomists are faced with when
they try to understand ination dynamics and to analyze the effects of monetary
policy. In the frequently used macroeconomic models, prices are assumed not to
be freely revised at any time and under any conditions but to be revised only at
given times. Monetary policy in the typical macro-models may affect the real
*Song: Bank of Korea, 67 Sejong-daero, Jung-gu, Seoul 04514, Korea. Yie (corresponding
author): Kongju National University, 56 Gongju Deahak-ro, Gongju-si, Chungnam 32588, Korea.
Email: myungsoo.yie@kongju.ac.kr. Park: Bank of Korea, 67 Sejong-daero, Jung-gu, Seoul 04514,
Korea. The opinions expressed here are solely those of the authors and must not be interpreted as
the opinions of the Bank of Korea. We thank Insu Kim and Keunkwan Ryu for helpful comments
and suggestions.
© 2020 East Asian Economic Association and John Wiley & Sons Australia, Ltd
Asian Economic Journal 2020, Vol.34 No.1, 97120 97
economy at least in the short run thanks to such price stickiness. Therefore, patient
revision of prices, captured as either state-dependent conditions for price revisions
or stochastic revision processes of prices at the given time, are at the center of the
analysis of the magnitude and duration of monetary policy effects, and of the anal-
ysis of ination dynamics, because misspecication of the model is inevitable if
the price revision scheme does not represent the economic reality correctly.
1
For
this reason, it is necessary to undertake more detailed analysis of the price revision
process at the rm level as well as the industry level for the sake of obtaining a
deeper understanding of ination dynamics.
A number of analyses of price revisions have been conducted in academia
and central banks. Following the Cecchetti (1986) study of magazine prices,
large datasets of price quotes have been analyzed intensively.
2
Conclusions that
prices at the rm level may remain unchanged for time periods that can last for
several months to 1 year have been reached in almost every economy, but a con-
sensus on the implied average duration of prices and the key reasons for keeping
prices unchanged has yet to be reached across economies. This is one of the rea-
sons why we analyze price revisions in Korea.
Two types of datasets are typically used for analysis of how prices at the rm
level are revised from the perspective of price stickiness. The rst approach is to
analyze large datasets, which are compiled by the statistical authority for the
ofcial consumer or producer price indices. The other is to analyze a small but
object-oriented survey, in which rms are asked directly about the specic price
revision process and the key conditions and reasons underlying it. This latter
approach has some analytical merit. An analysis of the price revision process
based on rm-level surveys may provide statistical estimates for key parameters
in the typical micro-founded macro-model accompanied by some reliable infor-
mation, because the questions associated with the key parameters cannot nor-
mally be raised by recycling raw data obtained in the process of compiling price
index statistics but can be asked to the rms directly in the survey. In addition,
the dispersions or distributions of the calibrated parameters in the model can be
extracted from the survey.
Recognizing the importance of understanding ination dynamics at the dis-
aggregated price level, central banks in advanced economies have occasionally
surveyed the revision process of the rm-level prices since the 1990s. An analy-
sis of survey data was rst undertaken by Blinder (1991) in the US, followed by
Fabiani et al. (2006) using the Ination Persistence Network survey in the EU,
by Amirault et al. (2006) in Canada, by Nakagawa et al. (2000) in Japan, and
by Hall et al. (1997) in the UK. A pilot survey on the price revision process in
Korea was conducted in 2008 by the Bank of Korea, and a survey with a revised
1 For example, Dotsey et al. (1999) argue that the effects of monetary policy are weaker under a
state-dependent scheme compared to a time-dependent scheme.
2 For example, see Bils and Klenow (2004), Alvarez et al. (2006), Klenow and Kryvtsov (2008),
Nakamura and Steinsson (2008), Boivin et al. (2009), Klenow and Malin (2010) and Vavra (2014).
ASIAN ECONOMIC JOURNAL 98

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