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Quality Pricing-to-Market

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  • Raphael Anton Auer
  • Thomas Chaney
  • Philip Ulrich Sauré

Abstract

We document that in the European car industry, exchange rate pass-through is larger for low than for high quality cars. To rationalize this pattern, we develop a model of quality pricing and international trade based on the preferences of Musa and Rosen (1978). Firms sell goods of heterogeneous quality to consumers that differ in their willingness to pay for quality. Each firm produces a unique quality of the good and enjoys local market power, which depends on the prices and qualities of its closest competitors. The market power of a firm depends on the prices and qualities of its direct competitors in the quality dimension. The top quality firm, being exposed to just one direct competitor, enjoys the highest market power and equilibrium markup. Because higher quality exporters are closer to the technological leader, markups are generally increasing in quality, exporting is relatively more profitable for high quality than for low quality firms, and the degree of exchange rate pass-through is decreasing in quality.

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Bibliographic Info

Paper provided by Swiss National Bank in its series Working Papers with number 2012-11.

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Length: 62 pages
Date of creation: 2012
Date of revision:
Handle: RePEc:snb:snbwpa:2012-11

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Citations

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Cited by:
  1. Raphael Auer, 2009. "Product Heterogeneity, Within-Industry Trade Patterns, and the Home Bias of Consumption?," Working Papers, Swiss National Bank, Study Center Gerzensee 09.05, Swiss National Bank, Study Center Gerzensee.
  2. Raphael A. Auer, 2013. "Product Heterogeneity, Cross-Country Taste Differences, and the Consumption Home Bias," Working Papers, Swiss National Bank, Study Center Gerzensee 13.01, Swiss National Bank, Study Center Gerzensee.
  3. Raphael Auer & Philip Sauré, 2011. "Spatial Competition in Quality, Demand-Induced Innovation, and Schumpeterian Growth," Working Papers, Swiss National Bank, Study Center Gerzensee 11.04, Swiss National Bank, Study Center Gerzensee.
  4. Raphael A. Auer & Raphael S. Schoenle, 2012. "Market structure and exchange rate pass-through," Globalization and Monetary Policy Institute Working Paper, Federal Reserve Bank of Dallas 130, Federal Reserve Bank of Dallas.
  5. Raphael Schoenle & Raphael Auer, 2012. "Market Structure and Pass-Through," 2012 Meeting Papers, Society for Economic Dynamics 61, Society for Economic Dynamics.
  6. Raphael Anton Auer, 2012. "Exchange Rate Pass-Through, Domestic Competition, and Inflation: Evidence from the 2005/08 Revaluation of the Renminbi," Working Papers, Swiss National Bank 2012-01, Swiss National Bank.

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