A model of pricing behavior: An econometric case study

Empirical pricing studies are scarce in the modern literature in spite of their obvious importance for understanding competition. The present study employs a structural model to identify deviations of individual pricing routines from the commonly assumed single-period profit maximization. It is applied to individual wholesale firms, because wholesale pricing has a decisive influence on the price formation in the entire economic system and because hardly any research exists in this area. The results show that wholesale firms operate in imperfectly competitive world markets providing a highly differentiated service package. Traders apply pricing rules consistent with cost mark-up pricing. The mark-up varies among traders with the extent to which a firm's pricing strategy deviates from full profit maximization. This divergent behavior is associated with firm size, the type of buyers served and other aspects of the wholesale service package.