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The impact of exchange rate fluctuations on profit margins: The UK car market, 1971-2002

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Abstract

We investigate the impact on profit margins of exchange rate fluctuations in order to examine optimal pricing policy by source countries in the UK car market. We first estimate a nested logit demand model of new cars to calculate model-specific profit margins. Next we use these estimates to analyse the pricing-to-market (PTM) behaviour of car importers and local producers. The results show that: (1) profit margins fell over the period 1971-2002 as the UK car market moved from being a concentrated market to a looser oligopoly structure; (2) there is a positive association between exchange rate changes and mark-up adjustments of imported cars. Following a 10% pound depreciation, exporters' profit margins declined by up to 4% and local producers' profit margins increased by up to 2%; (3) PTM behaviour is asymmetric between appreciations and depreciations in bilateral exchange rates.

Suggested Citation

  • Francisco Requena-Silvente & James Walker, 2007. "The impact of exchange rate fluctuations on profit margins: The UK car market, 1971-2002," Journal of Applied Economics, Universidad del CEMA, vol. 10, pages 213-235, May.
  • Handle: RePEc:cem:jaecon:v:10:y:2007:n:1:p:213-235
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    File URL: https://ucema.edu.ar/publicaciones/download/volume10/requena.pdf
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    Cited by:

    1. Sánchez Navarro, Dennis, 2013. "Análisis de elasticidades en el mercado automotor colombiano (2009 - 2011) mediante un modelo logit anidado
      [Analysis Of Elasticity In Colombian Automotive Market (2009 - 2011) Through A Nested Log
      ," MPRA Paper 46043, University Library of Munich, Germany.

    More about this item

    Keywords

    exchange rates; markup adjustment; pricing to market; cars;

    JEL classification:

    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
    • L6 - Industrial Organization - - Industry Studies: Manufacturing

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