Structural Estimation of Price Adjustment Costs in the European Car Market

Exchange rate pass-through literature identifies an important delay in price responses, especially in differentiated products. Using the methodology of Bajari, Benkard and Levin (2007), I estimate the structural price adjustment cost consistent with this fact in the European car market. My approach differs from previous work in that my framework allows me greater flexibility in estimating dynamic games. My main result is that relatively small adjustment costs rationalize the observed inertia in car prices. Intuitively, forward looking price setters face an autocorrelated economic environment (like the nominal exchange rates, GDP and wages) such that just a small cost of repricing justify the persistent prices in the European car market. Additionally, my estimates stress a market-specific heterogeneity in price stickiness suggesting a new dimension of pricing to market behavior.