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Firms’ Heterogeneity and Incomplete Pass-Through

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  • STEFANIA GARETTO

    () (Department of Economics, Boston University)

Abstract

A large body of empirical work documents that prices of traded goods change by a smaller proportion than real exchange rates between the trading countries (incomplete pass-through). The wedge between exchange rates and relative prices also varies a cross countries (pricing-to-market). I present a model of trade and international price-setting with heterogeneous firms, where firms’ strategic behavior implies that: 1) firm-level pass-through is incomplete and a U-shaped function of firm market share; 2) exchange rate fluctuations affect both the prices of traded goods and the prices of goods sold domestically; and 3) firm-level pass-through varies across destination countries. Estimates from a panel data set of cars prices support the predictions of the model.

Suggested Citation

  • Stefania Garetto, 2014. "Firms’ Heterogeneity and Incomplete Pass-Through," Boston University - Department of Economics - Working Papers Series WP2014-006, Boston University - Department of Economics.
  • Handle: RePEc:bos:wpaper:wp2014-006
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    File URL: http://www.bu.edu/econ/files/2009/07/FHIPT_14.pdf
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    References listed on IDEAS

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    Cited by:

    1. repec:wly:iecrev:v:60:y:2019:i:1:p:413-446 is not listed on IDEAS
    2. 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.
    3. Mary Amiti & Oleg Itskhoki & Jozef Konings, 2014. "Importers, Exporters, and Exchange Rate Disconnect," American Economic Review, American Economic Association, vol. 104(7), pages 1942-1978, July.
    4. Luigi Paciello & Andrea Pozzi & Nicholas Trachter, 2019. "Price Dynamics With Customer Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 60(1), pages 413-446, February.
    5. repec:eee:inecon:v:110:y:2018:i:c:p:87-102 is not listed on IDEAS
    6. S. Guilloux-Nefussi, 2016. "Globalization, Market Structure and Inflation Dynamics," Working papers 610, Banque de France.
    7. Goldberg, Linda & Tille, Cédric, 2013. "A bargaining theory of trade invoicing and pricing," Kiel Working Papers 1839, Kiel Institute for the World Economy (IfW).
    8. repec:bla:worlde:v:40:y:2017:i:7:p:1314-1344 is not listed on IDEAS
    9. Balázs Murakozy & Katheryn Niles Russ, 2015. "Competition with Multinational Firms: Theory and Evidence," IEHAS Discussion Papers 1534, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
    10. Michael Devereux & Wei Dong & Ben Tomlin, 2015. "Exchange Rate Pass-Through, Currency of Invoicing and Market Share," Staff Working Papers 15-31, Bank of Canada.
    11. A. Auer, Raphael & Chaney, Thomas & Sauré, Philip, 2018. "Quality pricing-to-market," Journal of International Economics, Elsevier, vol. 110(C), pages 87-102.
    12. repec:got:cegedp:133 is not listed on IDEAS
    13. Eike Berner & Laura Birg & Dominik Boddin, 2017. "Retailers and Consumers: The Pass-through of Import Price Changes," The World Economy, Wiley Blackwell, vol. 40(7), pages 1314-1344, July.
    14. Alan ASPRILLA & Nicolas BERMAN & Olivier CADOT & Melise JAUD, 2016. "Trade Policy and Market Power: Firm-level Evidence," Working Papers P161, FERDI.
    15. Beatriz de Blas & Katheryn N. Russ, 2010. "Teams of rivals: endogenous markups in a Ricardian world," Globalization Institute Working Papers 67, Federal Reserve Bank of Dallas.
    16. Beatriz de Blas & Katheryn N. Russ, 2015. "Understanding Markups in the Open Economy," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(2), pages 157-180, April.
    17. Nicolas Berman & Alan Asprilla & Olivier Cadot & Mélise Jaud, 2015. "Pricing-to-market, Trade Policy, and Market Power," IHEID Working Papers 04-2015, Economics Section, The Graduate Institute of International Studies.
    18. Raphael Schoenle & Raphael Auer, 2012. "Market Structure and Pass-Through," 2012 Meeting Papers 61, Society for Economic Dynamics.
    19. Beatriz de Blas & Katheryn Russ, 2010. "Understanding Markups in the Open Economy under Bertrand Competition," NBER Working Papers 16587, National Bureau of Economic Research, Inc.
    20. Cadot, Olivier, 2014. "Pricing to Market as a Revelator of Policy-Induced Market Power," Papers 796, World Trade Institute.

    More about this item

    Keywords

    Heterogeneous firms; incomplete pass-through; pricing to market;

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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