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A Bargaining Theory of Trade Invoicing and Pricing

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Abstract

We develop a theoretical model of international trade pricing in which individual exporters and importers bargain over the transaction price and exposure to exchange rate ‡uctuations. We nd that the choice of price and invoicing currency re‡ects the full market structure, including the extent of fragmentation and the degree of heterogeneity across importers and across exporters. Our study shows that a party has a higher e¤ective bargaining weight when it is large or more risk tolerant. A higher e¤ective bargaining weight of importers relative to exporters in turn translates into lower import prices and greater exchange rate pass-through into import prices. We show the range of price and invoicing outcomes that arise under alternative market structures. Such structures matter not only for the outcome of speci c exporter-importer transactions, but also for aggregate variables such as the average price, the average choice of invoicing currency, and the correlation between invoicing currency and the size of trade transactions.

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Bibliographic Info

Paper provided by Economics Section, The Graduate Institute of International Studies in its series IHEID Working Papers with number 08-2013.

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Length: 57 pages
Date of creation: 13 Apr 2013
Date of revision:
Handle: RePEc:gii:giihei:heidwp09-2013

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Keywords: currency; invoicing; exchange rate;

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  1. Roman Inderst & Christian Wey, 2001. "Bargaining, Mergers, and Technology Choice in Bilaterally Oligopolistic Industries," CIG Working Papers FS IV 01-19, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
  2. Charles Engel, 2005. "Equivalence Results for Optimal Pass-Through, Optimal Indexing to Exchange Rates, and Optimal Choice of Currency for Export Pricing," NBER Working Papers 11209, National Bureau of Economic Research, Inc.
  3. Devereux, Michael B. & Engel, Charles & Storgaard, Peter E., 2004. "Endogenous exchange rate pass-through when nominal prices are set in advance," Journal of International Economics, Elsevier, vol. 63(2), pages 263-291, July.
  4. Michael B. Devereux & Shouyong Shi, 2008. "Vehicle currency," Globalization and Monetary Policy Institute Working Paper 10, Federal Reserve Bank of Dallas.
    • Michael B. Devereux & Shouyong Shi, 2013. "Vehicle Currency," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 54(1), pages 97-133, 02.
  5. Hans-Theo Normann & Bradley J. Ruffle & Christopher M. Sndyer, 2003. "Do Buyer-Size Discounts Depend on the Curvature of the Surplus Function? Experimental Tests of Bargaining Models," Experimental 0308001, EconWPA.
  6. P. Bacchetta & E. van Wincoop, 2002. "A Theory of the Currency Denomination of International Trade," DNB Staff Reports (discontinued) 75, Netherlands Central Bank.
  7. Cedric Tille & Eric van Wincoop, 2007. "International Capital Flows," Working Papers 122007, Hong Kong Institute for Monetary Research.
  8. Hellerstein, Rebecca, 2008. "Who bears the cost of a change in the exchange rate? Pass-through accounting for the case of beer," Journal of International Economics, Elsevier, vol. 76(1), pages 14-32, September.
  9. Friberg, Richard, 1998. "In which currency should exporters set their prices?," Journal of International Economics, Elsevier, vol. 45(1), pages 59-76, June.
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  11. Selcuk, Cemil, 2012. "Trading mechanism selection with directed search when buyers are risk averse," Economics Letters, Elsevier, vol. 115(2), pages 207-210.
  12. Dobson, Paul W & Waterson, Michael, 1997. "Countervailing Power and Consumer Prices," Economic Journal, Royal Economic Society, vol. 107(441), pages 418-30, March.
  13. Tasneem Chipty & Christopher M. Snyder, 1999. "The Role Of Firm Size In Bilateral Bargaining: A Study Of The Cable Television Industry," The Review of Economics and Statistics, MIT Press, vol. 81(2), pages 326-340, May.
  14. Horn, H. & Wolinsky, A., 1988. "Bilateral Monopolies And Incentives For Merger," Papers 410, Stockholm - International Economic Studies.
  15. Raphael A. Auer & Raphael S. Schoenle, 2012. "Market structure and exchange rate pass-through," Globalization and Monetary Policy Institute Working Paper 130, Federal Reserve Bank of Dallas.
  16. Friberg, Richard & Wilander, Fredrik, 2008. "The currency denomination of exports -- A questionnaire study," Journal of International Economics, Elsevier, vol. 75(1), pages 54-69, May.
  17. Beatriz de Blas & Katheryn Russ, 2010. "Understanding Markups in the Open Economy under Bertrand Competition," NBER Working Papers 16587, National Bureau of Economic Research, Inc.
  18. Gabriele Camera & Cemil Selcuk, 2009. "Price Dispersion with Directed Search," Journal of the European Economic Association, MIT Press, vol. 7(6), pages 1193-1224, December.
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  20. Novy, Dennis, 2006. "Hedge Your Costs: Exchange Rate Risk and Endogenous Currency Invoicing," The Warwick Economics Research Paper Series (TWERPS) 765, University of Warwick, Department of Economics.
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As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Bargaining power and international pricing
    by Economic Logician in Economic Logic on 2013-06-06 14:27:00
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Cited by:
  1. Eichengreen, Barry & Chiţu, Livia & Mehl, Arnaud, 2014. "Network effects, homogeneous goods and international currency choice: new evidence on oil markets from an older era," Working Paper Series 1651, European Central Bank.

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