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Financial Constraints and Firms' Pricing Decisions
October 2009
Takeshi Kimura*
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Abstract
This paper empirically examines the impact of financial constraints on Japanese firms' pricing behavior. In spite of a large swing in demand in the bubble era and the lost decade, aggregate prices did not fluctuate much in these periods. Such price rigidity can be explained by customer market theory, which suggests that firms invest in the customer stock, i.e., market share, by charging low prices in booms, while they do not cut their prices for locked-in customers in recessions. This theory implies that the pricing decision is an investment problem, and opens the possibility for financial factors to affect the pricing decision. The estimation results show that financial positions affect the pricing behavior of large firms, but not that of small firms. The impact of financial positions on large firms' prices is counter-cyclical, and this characteristic is clearly observed in the industries that produce differentiated goods such as advanced machines. In contrast, small firms whose product brand is not well established in the market cannot lock in customers, and hence financial constraints do not affect their pricing decisions.
JEL Classification: D4, E31, L11 Keywords: customer market theory, price rigidity, financial constraints.
| * | International Department, Bank of Japan E-mail: takeshi.kimura@boj.or.jp |
I am grateful for helpful discussions and comments from Athanasios
Orphanides, Andrew Levin, Egon Zakraj
ek, Eric
Swanson, David Small, Hideo Hayakawa, Robert Chirinko, Shinichi Fukuda, Simon
Gilchrist, Toshitaka Sekine, as well as seminar participants at the Bank of
Japan and the Federal Reserve Board. I also thank Jason Grimm for his excellent
research assistance. The views expressed herein are those of the author alone
and not necessarily those of the Bank of Japan.
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