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Market structure and exchange rate pass-through

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  • Auer, Raphael A.
  • Schoenle, Raphael S.

Abstract

We study firm-level pricing behavior through the lens of exchange rate pass-through and provide new evidence on how firm-level market shares and price complementarities affect pass-through decisions. Using U.S. import price micro data, we identify two facts: First, exactly the firms that react the most with their prices to changes in their own costs are also the ones that react the least to changing prices of competing importers. Second, the response of import prices to exchange rate changes is U-shaped in our proxy for market share while it is hump-shaped in response to the prices of competing importers. We show that both facts are consistent with a model based on Dornbusch (1987) that generates variable markups through a nested-CES demand system. Finally, based on the model, we find that direct cost pass-through and price complementarities among importers play approximately equally important roles in determining pass-through but also partly offset each other. This suggests that equilibrium feedback effects in import pricing are large. Omission of either channel in an empirical analysis results in a failure to explain how market structure affects price-setting in industry equilibrium.

Suggested Citation

  • Auer, Raphael A. & Schoenle, Raphael S., 2016. "Market structure and exchange rate pass-through," Journal of International Economics, Elsevier, vol. 98(C), pages 60-77.
  • Handle: RePEc:eee:inecon:v:98:y:2016:i:c:p:60-77
    DOI: 10.1016/j.jinteco.2015.10.003
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    More about this item

    Keywords

    Price setting; Exchange rate pass-through; U.S. import prices; Market structure; Price complementarities;
    All these keywords.

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • L60 - Industrial Organization - - Industry Studies: Manufacturing - - - General

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