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Structural Estimation of Price Adjustment Costs in the European Car Market

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  • Carlos Noton

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Abstract

This paper characterizes the price adjustment costs that are consistent with observed price dynamics in the European car market. Using the methodology developed by Bajari, Benkard, and Levin (2007), I estimate a dynamic model of international multiproduct firms that set prices in different currencies while facing price adjustment costs. There are three main results. First, the incomplete degree of exchange rate pass-through can be explained by a sizable destination-currency cost component. Second, large price adjustment costs are not needed to rationalize the large degree of price inertia in a highly autocorrelated economic environment. In fact, small adjustment costs can rationalize the persistent prices observed. Third, the paper identi.es an unexplored temporal dimension of "pricing-to-market" behavior, that is the practice of setting prices differently across segmented markets. Estimates of the price adjustment cost suggest that a uniform cost structure is not consistent with the pricing behavior observed.

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Bibliographic Info

Paper provided by Centro de Economía Aplicada, Universidad de Chile in its series Documentos de Trabajo with number 303.

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Date of creation: 2013
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Handle: RePEc:edj:ceauch:303

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  1. Jose Antonio Rodriguez Lopez, 2008. "Prices and Exchange Rates: A Theory of Disconnect," Working Papers 080902, University of California-Irvine, Department of Economics, revised Sep 2010.
  2. Ariel T. Burstein & Joao C. Neves & Sergio Rebelo, 2000. "Distribution Costs and Real Exchange Rate Dynamics During Exchange-Rate-Based Stabilizations," RCER Working Papers 473, University of Rochester - Center for Economic Research (RCER).
  3. Barro, Robert J, 1972. "A Theory of Monopolistic Price Adjustment," Review of Economic Studies, Wiley Blackwell, vol. 39(1), pages 17-26, January.
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  5. Goldberg, Pinelopi & Verboven, Frank, 2001. "Market Integration and Convergence to the Law of One Price: Evidence from the European Car Market," CEPR Discussion Papers 2926, C.E.P.R. Discussion Papers.
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  8. Patrick Bajari & C. Lanier Benkard & Jonathan Levin, 2007. "Estimating Dynamic Models of Imperfect Competition," Econometrica, Econometric Society, vol. 75(5), pages 1331-1370, 09.
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  14. Berry, Steve & Pakes, Ariel, 2001. "Additional information for: "Comments on "Alternative models of demand for automobiles" by Charlotte Wojcik"," Economics Letters, Elsevier, vol. 74(1), pages 43-51, December.
  15. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-90, July.
  16. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February.
  17. Botond Kőszegi & Paul Heidhues, 2008. "Competition and Price Variation When Consumers Are Loss Averse," American Economic Review, American Economic Association, vol. 98(4), pages 1245-68, September.
  18. Wojcik, Charlotte, 2000. "Alternative models of demand for automobiles," Economics Letters, Elsevier, vol. 68(2), pages 113-118, August.
  19. Sven W. Arndt & J. David Richardson, 1987. "Real-Financial Linkages Among Open Economies," NBER Working Papers 2230, National Bureau of Economic Research, Inc.
  20. Pinelopi K. Goldberg & Michael M. Knetter, 1996. "Goods Prices and Exchange Rates: What Have We Learned?," NBER Working Papers 5862, National Bureau of Economic Research, Inc.
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