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Exchange Rate Pass-Through When Market Share Matters

Author

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  • Froot, Kenneth A
  • Klemperer, Paul D

Abstract

The authors investigate the pass-through from exchange rates to import prices when firms' future demands depend on their current market shares. They show that profit-maximizing foreign firms may either raise or lower their dollar export prices when the dollar appreciates temporarily (i.e., the pass-through may be perverse) and that current import prices may be more sensitive to expected future exchange rates than to current exchange rates. They present evidence that suggests the behavior of expected future exchange rates may provide a clue to the puzzling recent behavior of U.S. import prices. Copyright 1989 by American Economic Association.

Suggested Citation

  • Froot, Kenneth A & Klemperer, Paul D, 1989. "Exchange Rate Pass-Through When Market Share Matters," American Economic Review, American Economic Association, vol. 79(4), pages 637-654, September.
    • Handle: RePEc:aea:aecrev:v:79:y:1989:i:4:p:637-54
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    References listed on IDEAS

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    1. Paul Klemperer, 1987. "Markets with Consumer Switching Costs," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 102(2), pages 375-394.
    2. Frankel, Jeffrey A & Froot, Kenneth A, 1987. "Using Survey Data to Test Standard Propositions Regarding Exchange Rate Expectations," American Economic Review, American Economic Association, vol. 77(1), pages 133-153, March.
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    6. Richard Baldwin & Paul Krugman, 1989. "Persistent Trade Effects of Large Exchange Rate Shocks," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 104(4), pages 635-654.
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    8. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-440, June.
    9. Baldwin, Richard, 1990. "Hysteresis in Trade," Empirical Economics, Springer, vol. 15(2), pages 127-142.
    10. Dornbusch, Rudiger, 1987. "Exchange Rates and Prices," American Economic Review, American Economic Association, vol. 77(1), pages 93-106, March.
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    13. Farrell, Joseph, 1987. "Competition with Lock-In," Department of Economics, Working Paper Series qt93h8x6ht, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    14. Barsky, Robert B & Summers, Lawrence H, 1988. "Gibson's Paradox and the Gold Standard," Journal of Political Economy, University of Chicago Press, vol. 96(3), pages 528-550, June.
    15. repec:adr:anecst:y:1986:i:3:p:04 is not listed on IDEAS
    16. Jeffrey A. Frankel & Kenneth A. Froot, 1985. "Using Survey Data to Test Some Standard Propositions Regarding Exchange Rate Expectations," NBER Working Papers 1672, National Bureau of Economic Research, Inc.
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