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Firms’ Heterogeneity, Incomplete Information, and Pass-Through

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  • Stefania Garetto

    () (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). I present a Ricardian model of trade and international price-setting with heterogeneous firms, Bertrand competition and incomplete information. The model implies that: 1) firm-level pass- through is incomplete and a U-shaped function of firm-level productivity and market share; and 2) controlling for firm market share, producers operating under incomplete information, like for example new entrants in a market, exhibit lower pass-through rates than producers operating under complete information. Estimates from a panel data set of cars prices support the predictions of the model.

Suggested Citation

  • Stefania Garetto, 2016. "Firms’ Heterogeneity, Incomplete Information, and Pass-Through," Boston University - Department of Economics - Working Papers Series wp2016-004, Boston University - Department of Economics.
  • Handle: RePEc:bos:wpaper:wp2016-004
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    File URL: http://www.bu.edu/econ/files/2016/05/FHIIPT_16.pdf
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. M. Bussière & G. Gaulier & W. Steingress, 2016. "Global Trade Flows: Revisiting the Exchange Rate Elasticities," Working papers 608, Banque de France.
    2. repec:kap:jincot:v:18:y:2018:i:2:d:10.1007_s10842-017-0256-1 is not listed on IDEAS
    3. Devereux, Michael B. & Dong, Wei & Tomlin, Ben, 2017. "Importers and exporters in exchange rate pass-through and currency invoicing," Journal of International Economics, Elsevier, vol. 105(C), pages 187-204.
    4. repec:eee:inecon:v:110:y:2018:i:c:p:87-102 is not listed on IDEAS
    5. repec:eee:inecon:v:114:y:2018:i:c:p:180-202 is not listed on IDEAS
    6. Jordi Jaumandreu & Shuheng Lin, 2018. "Prices under Innovation: Evidence from Manufacturing Firms," Working Papers 2019-07-04, Wang Yanan Institute for Studies in Economics (WISE), Xiamen University.
    7. Lyonnet, Victor & Martin, Julien & Mejean, Isabelle, 2016. "Invoicing Currency and Financial Hedging," CEPR Discussion Papers 11700, C.E.P.R. Discussion Papers.
    8. A. Auer, Raphael & Chaney, Thomas & Sauré, Philip, 2018. "Quality pricing-to-market," Journal of International Economics, Elsevier, vol. 110(C), pages 87-102.

    More about this item

    Keywords

    Heterogeneous firms; incomplete information; incomplete pass-through;

    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
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions

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