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International Shocks, Variable Markups, and Domestic Prices

Author

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  • Mary Amiti
  • Oleg Itskhoki
  • Jozef Konings

Abstract

How strong are strategic complementarities in price setting across firms? In this article, we provide a direct empirical estimate of firms’ price responses to changes in competitor prices. We develop a general theoretical framework and an empirical identification strategy, taking advantage of a new micro-level dataset for the Belgian manufacturing sector. We find strong evidence of strategic complementarities, with a typical firm adjusting its price with an elasticity of 0.4 in response to its competitors’ price changes and with an elasticity of 0.6 in response to its own cost shocks. Furthermore, we find evidence of substantial heterogeneity in these elasticities across firms. Small firms exhibit no strategic complementarities in price setting and complete cost pass-through. In contrast, large firms exhibit strong strategic complementarities, responding to both competitor price changes and their own cost shocks with roughly equal elasticities of around 0.5. We show that this pattern of heterogeneity in markup variability across firms is important for explaining the aggregate markup response to international shocks and the observed low exchange rate pass-through into domestic prices.

Suggested Citation

  • Mary Amiti & Oleg Itskhoki & Jozef Konings, 2019. "International Shocks, Variable Markups, and Domestic Prices," Review of Economic Studies, Oxford University Press, vol. 86(6), pages 2356-2402.
  • Handle: RePEc:oup:restud:v:86:y:2019:i:6:p:2356-2402.
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    File URL: http://hdl.handle.net/10.1093/restud/rdz005
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    Citations

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    Cited by:

    1. Holger Breinlich & Elsa Leromain & Dennis Novy & Thomas Sampson, 2019. "Exchange Rates and Consumer Prices: Evidence from Brexit," CESifo Working Paper Series 8001, CESifo.
    2. Yining Geng, 2020. "Impact of Family Planning Policy on Gender Inequality: Evidence from China," Working Papers 202008, University of Liverpool, Department of Economics.
    3. Ariu, Andrea & Mayneris, Florian & Parenti, Mathieu, 2020. "One way to the top: How services boost the demand for goods," Journal of International Economics, Elsevier, vol. 123(C).
    4. Maiko Koga & Koichi Yoshino & Tomoya Sakata, 2020. "Strategic complementarity and asymmetric price setting among firms," BIS Papers chapters, in: Bank for International Settlements (ed.),Inflation dynamics in Asia and the Pacific, volume 111, pages 85-97, Bank for International Settlements.
    5. Chen, Natalie & Juvenal, Luciana, 2019. "Markups, Quality, and Trade Costs," CAGE Online Working Paper Series 446, Competitive Advantage in the Global Economy (CAGE).
    6. Horvath, Roman & Kaszab, Lorant & Marsal, Ales & Rabitsch, Katrin, 2020. "Determinants of fiscal multipliers revisited," Journal of Macroeconomics, Elsevier, vol. 63(C).
    7. Yining Geng, 2020. "Impact of Family Planning Policy on Gender Inequality: Evidence from China," Working Papers 202009, University of Liverpool, Department of Economics.
    8. Mary Amiti & Stephen J. Redding & David E. Weinstein, 2020. "Who's Paying for the US Tariffs? A Longer-Term Perspective," AEA Papers and Proceedings, American Economic Association, vol. 110, pages 541-546, May.
    9. Giuliano, Fernando & Luttini, Emiliano, 2020. "Import prices and invoice currency: Evidence from Chile," Journal of International Money and Finance, Elsevier, vol. 106(C).
    10. Giancarlo Corsetti & Meredith Crowley & Lu Han, 2020. "Invoicing and Pricing-to-market: Evidence on international pricing by UK exporters," Working Papers 202007, University of Liverpool, Department of Economics.
    11. Hélène Latzer & Kiminori Matsuyama & Mathieu Parenti, 2019. "Reconsidering the Market Size Effect in Innovation and Growth," Working Papers ECARES 2019-31, ULB -- Universite Libre de Bruxelles.
    12. Casas, Camila, 2020. "Industry heterogeneity and exchange rate pass-through," Journal of International Money and Finance, Elsevier, vol. 106(C).

    More about this item

    Keywords

    Price setting; Strategic complementarities; Markups; Pass-through; Imported inputs; Exchange rate;

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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