The speed and stability of price adjustment in Australian manufacturing

Abstract

A model of industry speed of price adjustment is derived from firm pricing behaviours. The model is applied to quarterly two-digit Australian manufacturing data for the period 1985:3 to 2002:3. Initially, the industry speed of price adjustment is treated as a function of structural cross-section variables. The results suggest that the industry speed of price adjustment is positively related to the average size of large firms within the industry and is negatively related to industry concentration. With the inclusion of time variables into the final estimating equation, we find that import share has a role in attenuating the effects of industry concentration and that the trend real GDP growth reduces the speed of price adjustment. While a 1990s dummy variable is included in the final estimating equation and is found to be significant, its magnitude is too small to be of economic importance. Calculated industry speeds of price adjustment are stable across the period of examination but are also small, suggesting that manufacturing prices are sticky.