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Tariffs and Markups in Retailing

Author

Listed:
  • Matthew T. Cole

    () (Department of Economics, California Polytechnic State University)

  • Carsten Eckel

    () (University of Munich)

Abstract

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.

Suggested Citation

  • Matthew T. Cole & Carsten Eckel, 2016. "Tariffs and Markups in Retailing," Working Papers 1604, California Polytechnic State University, Department of Economics.
  • Handle: RePEc:cpl:wpaper:1604
    as

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    File URL: https://www.cob.calpoly.edu/undergrad/wp-content/uploads/sites/3/2016/05/paper1604.pdf
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    References listed on IDEAS

    as
    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. 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.
    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.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Variable Markups; Retailing; Trade Policy;

    JEL classification:

    • F1 - International Economics - - Trade
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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