Pricing-to-Market Effects in Foreign Trade Prices. Evidence from a Cointegration Approach for Germany
AbstractThe article analyses the impact of exchange rate changes on German export and import prices. The analytical framework is a mark-up model which is based on the assumption that the markets under consideration are imperfectly competitive as well as segmented. Hence, firms will no longer set prices at marginal costs, but charge a mark-up on costs to earn above normal profits. The mark-up is not fixed, but can be adjusted in response to demand pressure and competitive pressure in the relevant market. Consequently, firms can practice price discrimination. We find evidence that domestic and foreign producers follow different price setting strategies: German exporters largely pass-through exchange rate changes; i.e. an appreciation of domestic currency is reflected in a significant increase in export prices (expressed in terms of foreign currency) indicating that German exporters have significant market power and/or face a fairly inelastic export demand curve. Foreign exporters to Germany, however, largely follow a pricing-to-market strategy; i.e. they absorb price increases due to an appreciation of foreign currency into their profit margins in order to stabilise export prices (expressed in terms of domestic currency). Thus, they can protect market shares in the highly competitive German market.
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Bibliographic InfoPaper provided by IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute in its series IMK Working Paper with number 07-2005.
Length: 24 pages
Date of creation: Dec 2005
Date of revision:
export prices; import prices; exchange rate pass-through; pric- ing to market; error correction model;
Find related papers by JEL classification:
- C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- F31 - International Economics - - International Finance - - - Foreign Exchange
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-02-17 (All new papers)
- NEP-IFN-2007-02-17 (International Finance)
- NEP-INT-2007-02-17 (International Trade)
- NEP-MIC-2007-02-17 (Microeconomics)
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