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Tariffs and Markups in Retailing

Listed author(s):
  • Matthew T. Cole

    ()

    (Department of Economics, California Polytechnic State University)

  • Carsten Eckel

    ()

    (University of Munich)

Conventional wisdom suggests that domestic manufacturers benefit from cost advantages vis-a-vis their foreign rivals. Tariffs on imported products or exchange rate depreciations are typically expected to raise relative prices of foreign goods and shift residual demands of domestic substitutes outwards. Here we show that these changes in wholesale/manufacturing prices can be offset and even dominated by adjustments in retail mark-ups. Retailers have an incentive to charge the highest mark-ups for low-cost products, and to adjust the mark-ups on these products most actively. Thus, if the procurement costs of some foreign products rises, retailers will shift these cost increases towards the most efficient domestic products thereby mitigating the benefits of a protectionist tariff. We show that this effect can dominate the traditional substitution effect.

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File URL: https://www.cob.calpoly.edu/undergrad/wp-content/uploads/sites/3/2016/05/paper1604.pdf
File Function: First version, 2016
Download Restriction: no

Paper provided by California Polytechnic State University, Department of Economics in its series Working Papers with number 1604.

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Length: 31 pages
Date of creation: 2016
Handle: RePEc:cpl:wpaper:1604
Contact details of provider: Web page: http://www.cob.calpoly.edu/academic/economics/

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  1. Arpita Chatterjee & Rafael Dix-Carneiro & Jade Vichyanond, 2013. "Multi-product Firms and Exchange Rate Fluctuations," American Economic Journal: Economic Policy, American Economic Association, vol. 5(2), pages 77-110, May.
  2. Horst Raff & Nicolas Schmitt, 2012. "Imports and the structure of retail markets," Canadian Journal of Economics, Canadian Economics Association, vol. 45(4), pages 1431-1455, November.
  3. Berner, Eike & Birg, Laura, 2012. "Retailers and Consumers: The pass-through of import price changes," Center for European, Governance and Economic Development Research Discussion Papers 133, University of Goettingen, Department of Economics.
  4. Sridhar Moorthy, 2005. "A General Theory of Pass-Through in Channels with Category Management and Retail Competition," Marketing Science, INFORMS, vol. 24(1), pages 110-122, August.
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