Competition and Pass-through on international markets: Firm-level evidence from VAT shocks

We rely on the French customs firm-level data and a model of imperfect competition on international markets to study how exporters pass a change in the VAT rate of one importing country through their prices. Contrasting with exchange-rate shocks, VAT-rate changes are longlasting, do not affect exporters’ marginal costs and affect exporters and domestic producers symmetrically. This shock combined with the individual dimension of the data set allows us to identify the extent of markup adjustment in exporters’ incomplete pass-through at the level of a firm and to point out the influence of changes in competition strength in the process. For a sample that covers French exportations to the Euro zone over the 1996-2005 period we find that (i) the median pass-through of VAT shocks is incomplete: 82% at a one-year horizon when all sectors are considered; (ii) exporters’ population is recomposed after the shock: an increase in VAT rate lowers the number of competitors on a given export market and increases the market share of the remaining ones; (iii) this change in competition affects the optimal markup adjustment: an increase in VAT lowers competition and allows the remaining exporters to pass more of the shock to their prices.