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Price Updating in Production Networks. National Bank of Belgium Working Paper No. 352

Duprez, Cédric and Magerman, Glenn (2018) Price Updating in Production Networks. National Bank of Belgium Working Paper No. 352. [Working Paper]

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    This paper evaluates how firms change their prices in response to cost shocks and other price changes in their environment. We first document three new facts on the heterogeneity of firm-level producer prices and their relation-ship to buyers and suppliers in a production network. We then develop a non-parametric framework of how producers update their prices, taking into account this production network. The framework is very general, and accounts for the heterogeneity in price changes and the production network from the stylized facts. Moreover, the framework is consistent with various price setting mechanisms, and does not impose a particular market structure or demand func-tional form. Exploiting rich data on producer prices and the network structure of production in Belgium, we estimate the model to evaluate the importance of both channels in the data. We find that, on average, input price pass-through is incomplete and very much below one, while firms also strongly react to other prices in their environment. This implies that firms can adjust their markups in response to both cost shocks and prices of other firms. Furthermore, firms react differently to common shocks than to idiosyncratic shocks, on average completely passing through common shocks, but much less idiosyncratic shocks.

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    Item Type: Working Paper
    Uncontrolled Keywords: Pricing, production networks, pass-through, variable markups
    Subjects for non-EU documents: Countries > Belgium
    EU policies and themes > Policies & related activities > economic and financial affairs > business/private economic activity
    Subjects for EU documents: UNSPECIFIED
    EU Series and Periodicals: UNSPECIFIED
    EU Annual Reports: UNSPECIFIED
    Series: Series > National Bank of Belgium (Brussels) > Working Papers
    Depositing User: Phil Wilkin
    Official EU Document: No
    Language: English
    Date Deposited: 29 Nov 2019 14:48
    Number of Pages: 34
    Last Modified: 29 Nov 2019 14:48

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