Price Updating in Production Networks
Working Paper N° 352
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.