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Price-Setting Behavior of Japanese Companies

The Results of "Survey of Price-Setting Behavior of Japanese Companies" and Its Analysis

August 2000
Bank of Japan
Research and Statistics Department*1

  • *1The survey was conducted and the results were analyzed mainly by Shinobu Nakagawa, Ryota Hattori and Izumi Takagawa (E-mail: izumi.takagawa@boj.or.jp), Research and Statistics Department, Bank of Japan.

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Abstract

  1. In recent years, the environment surrounding Japanese companies has been changed by a decrease in the expected growth, globalization, developments in information technology, and deregulation. To investigate how their price-setting behavior has been changing in these conditions, the Bank of Japan conducted the "Survey of Price-Setting Behavior of Japanese Companies" by contacting 1,206 companies listed on the First Section of the Tokyo Stock Exchange. Respondents did not include financial institutions, insurance and general trading companies.
  2. Many companies (manufacturing: 69%; nonmanufacturing: 63%) have changed their management strategies to focus on the rate of return on capital because of (i) a decrease in the expected growth in the product market and (ii) a strong pressure from stockholders to increase the rate of return. To increase the rate of return, more than 90% of companies have taken measures of "further increase in productivity or reduction in costs." On the other hand, some companies mainly in manufacturing (manufacturing: 54%; nonmanufacturing: 36%) are adopting non-price measures of "product differentiation instead of cutting prices."
  3. At the same time, about 90% of companies respond that "competition has become severe when compared to a few years ago" due to (i) a decrease in total demand, (ii) a scrutiny of business relationships by customers, (iii) an increase in domestic companies and imported products. To cope with severe competition, more than 70% companies resort to "product differentiation." But some companies respond that "price-cut" is inevitable.
  4. The price-setting behavior of Japanese companies has gradually changed from the stance that puts weight on capturing "market share" even by cutting prices (which was often pointed out to be a characteristic of Japanese companies), to a stance that focuses on "supply-demand conditions in the market" (thus, price is set at the upper limit permitted by the market), especially in manufacturing. Severe competition makes it difficult for companies to set prices according to the formula of "direct cost plus fixed mark-up," even though they put more importance on the rate of return. Especially, many nonmanufacturing companies strongly feel that "prices tend to be set by customers" under deregulation and developments in information technology.
  5. As the most important factor explaining price rigidity, manufacturing companies respond "co-ordination failure" and nonmanufacturing companies state "implicit contracts." It seems that manufacturing companies aim at increasing the rate of return on capital without cutting price as much as possible (they focus on "rival companies"), while nonmanufacturing companies face difficulties when they try to increase prices (they focus on "customer relationships").
  6. In conclusion, many companies' management strategies aim at attaching importance to the rate of return on capital. The price-setting behavior that stresses the importance of capturing market share even by cutting prices has not been preferred in recent years. At the same time, companies have had difficulties setting prices by using the "direct cost plus fixed mark-up" formula because of intensifying competition. As a result, it seems that an increasing number of companies set prices at the upper limit permitted by the market, taking into consideration supply-demand conditions in the market, the behavior of rival companies, customer relationships, and other factors.