Business Pricing Policies and Inflation: The Japanese Case

Abstract

HIS article presents some empirical evidence on the statistical significance of factors determining the pattern of price changes for Japanese manufacturing industries. We are particularly interested in the role played by market power, which is usually represented by the concentration ratio when demand and cost factors are taken into consideration, or the so-called administered prices inflation hypothesis (hereafter denoted as A.P.I.H.). The analytical framework for testing the A.P.I.H. was provided by Weiss (1966), and several studies applying his approach to different countries have been reported (Phlips, 1969; Sellekaerts and Lesage, 1973; Ripley and Segal, 1973; Dalton, 1973; Shinkai, 1974; Cagan, 1975; Lustgarten, 1975).' These prior studies, which produced mixed results for different countries, seem to indicate that pricing behavior of firms in concentrated industries is influenced by the level of capacity utilization or the business cycle phase, as emphasized by Sellekaerts and Lesage (1973). It will be one of our major findings that, in contrast to the negative results obtained by Shinkai (1974) and others (Nishikawa, 1973) for Japan in the past, highly significantly positive associations can be found between concentration and price changes if we focus on a particular phase of the business cycle. In other words, the A.P.I.H. is supported for the short-run price changes by our results, though not for the long-run. The present analysis also follows the Weiss approach, but in specifying a model we modified his formulation slightly to take account of the cross-industry aspect of the data, i.e., the fact that each industry has different production coefficients.2 The specification of our model is discussed in section II. After giving a preliminary investigation into the pattern of price changes in section III, we report the estimation results in sections IV and V. Some concluding remarks are given in section VI.