Price stickiness, price setting behavior and empirical research on Turkey

Price stickiness, based on the observation of that changes in nominal aggregate demand are not transmitted to prices simultaneously, means that, saying widely, in the face of the changes in the supply and demand conditions in market, prices adjust more slower than in the Walrasian analysis. Main factors that cause the price stickiness are market structure, price adjustment costs, contracts, judging price as a quality, features of goods, customer relationships, coordination failures, cost based pricing and constant marginal costs. In this framework, we try to determine the price setting behavior of Turkish manufacturing firms and whether the price stickiness exists or not.We begin to the first section by explaining the price stickiness conceptually. Then we discuss the firms? price setting behavior in the view of traditional economics and the critiques of this approach.In the second section we explain the main factors which affect the price stickiness. Besides, we evaluate these reasons? importance in the light of the results of the studies in the literature.Having mentioned Turkish manufacturing industry in general, we calculate the frequencies of price changes and average size of price changes between 1987 and 2009 in the third section. According to our calculations, when we compare to other countries in the world, the frequencies of price changes in Turkish manufacturing industry is very, about 90 %, high. These very high frequencies of price changes can not be interpreted as not being the price stickiness. Because this result does not mean that firms change their prices coincide with changes in the supply and demand conditions. To analyze this claim, it has tried to determine that firms whether adjust own prices coincide with a shock in the inflation by using generalized impulse response analysis in vector autoregressive model.Although the frequencies of price change are very high in Turkey, our findings show that firms adjust their prices in time, not simultaneously, in the face of changes in the demand or supply conditions. The most important factors which affect the firms? price setting process are market structure and high price-cost margins in subsectors.