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[2018-5] Heterogeneity in Price-Setting Patterns of Firms and Their Implications for Monetary Policy

Group : Articles in Monthly Bulletin
Research department (02-759-4254) 2018.06.15 970

This paper summarizes the results of the Bank of Korea’s “Survey on
Price-setting Patterns of Firms in 2016” and carries out a simulation to
analyze the implications for monetary policy.
The survey results can be summarized as follows. First, firms that
regularly check and change prices (rigid pricing) account for a majority of
all firms, but the number of firms that check and change prices (only) when
there is a factor causing price changes (flexible pricing) has increased.
Second, the frequency of price adjustments is found to differ from firm to
firm, and to have increased. Third, firms cite the following as the top
reasons for difficulties in changing prices: the value placed on long-term
business relationships with customers, the decisions of competitors to keep
prices unchanged, and strategic considerations. Fourth, firms are found to
keep their product prices unchanged unless there are large changes in costs,
demand or inflation. In addition, the share of firms that consider both
overall economic conditions and the relevant industry-specific environment
before setting prices is found to have grown since 2012. Last, firms set
prices mainly in consideration of optimum margins, prices of competitors,
and market supply and demand conditions.

This paper focuses on the heterogeneity in and the increase of the
frequency of price adjustments of firms and analyzes their impacts on the
effectiveness of monetary policy.
According to the analysis results, when the frequency of price
adjustments differs from firm to firm (rather than being the same for all
firms), monetary policy are found to have greater impacts on the real
sector (the output gap), while having reduced impacts on inflation. When th
e frequency of price adjustments increases, the effects of monetary policy
are analyzed to differ depending upon whether the frequency of price
adjustments is the same or different across firms.