An Emprical Analysis of Price Setting Behaviour in the Netherlands in the Period 1998-2003 Using Micro Data

In this paper we examine pricing behaviour of retail firms in the Netherlands during 1998-2003 using alarge database with monthly price quotes of 49 articles, representing different product types. We have conducted this study in order to gain in sight in the degree of nominal rigidity of consumer prices in the Dutch economy. We find that energy prices and prices of unprocessed food are most flexible, whereas prices of services are stickiest. Our sample contains not only ample evidence of upward but also of downward flexible prices. A multivariate analysis shows that firm size matters with prices being stickiest in small retail firms and most flexible in large retail firms and in the smallest retail firms consisting of the owners only. Furthermore, we investigate pass-through effects of VAT changes in product prices. We find that VAT increases are almost completely passed on to consumers. Finally, there is some evidence indicating that, after controlling for inflation, pricing behaviour of retail firms was different during the introduction of the euro than in the period directly preceding it.