Why so sluggish? Analyzing the determinants of price adjustments in the service sector using survey microdata

In this article, we study how the economic environment for firms in the service sector affects their price adjustments by using a novel dataset from the Services Survey of the Brazilian Institute of Economics from the Getulio Vargas Foundation (FGV). The set of variables from the survey includes the firms' assessments of business conditions, demand, revenue, employment and capacity utilization, as well as the factors that limit their business development, such as a lack of space, an underqualified workforce and financing costs, etc. We show that prices in the service sector are more sluggish because the response of firms to changes in their environment is heavily asymmetric. For example, when they foresee worse demand conditions, they are 3% less likely to increase prices, 2% more likely to keep prices constant and 0.6% more likely to lower prices. In addition to studying price setting determinants in the service sector, we show that behavior is consistent with both state and time-dependent price setting models. By estimating a state-dependent pricing model augmented by variables that indicate the last time a firm decided to raise prices, we find that these variables are significant and their marginal impact on price adjustment probability is positive.