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Structural estimation of price adjustment costs in the European car market

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  • Noton, Carlos

Abstract

This paper characterizes the price adjustment costs that are consistent with observed price dynamics in the European car market. We estimate a dynamic model of international multiproduct firms that set prices in different currencies while facing price adjustment costs. We find that large price adjustment costs are not needed to rationalize the substantial degree of price inertia we observe in the data. Intuitively, since GDP, wages and exchange rates exhibit such a large degree of autocorrelation, small adjustment costs can explain very persistent prices. Also, accounting for country-specific price sensitivity, wages, GDP and exchange rates, the price adjustment costs should differ substantially across producers and markets to match the data.

Suggested Citation

  • Noton, Carlos, 2016. "Structural estimation of price adjustment costs in the European car market," International Journal of Industrial Organization, Elsevier, vol. 49(C), pages 105-147.
  • Handle: RePEc:eee:indorg:v:49:y:2016:i:c:p:105-147
    DOI: 10.1016/j.ijindorg.2016.09.001
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    Cited by:

    1. Srisuma, Sorawoot, 2010. "Estimation of structural optimization models: a note on identification," LSE Research Online Documents on Economics 58071, London School of Economics and Political Science, LSE Library.

    More about this item

    Keywords

    Exchange rate pass-through; Structural estimation; Price adjustment costs;

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure

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