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Quality Pricing-to-Market

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  • Auer, Raphael
  • Chaney, Thomas
  • Sauré, Philip

Abstract

We examine firm's pricing-to-market decisions in vertically differentiated industries featuring a large number of firms that compete monopolistically in the quality space. Firms sell goods of heterogeneous quality to consumers with non-homothetic preferences that differ in their income and thus their marginal willingness to pay for quality increments. We derive closed-form solutions for the pricing game under costly international trade, thus establishing existence and uniqueness. We then examine how the interaction of good quality and market demand for quality affects firms' pricing-to-market decisions. The relative price of high quality goods compared to that of low quality goods is an increasing function of the income in the destination market. When relative costs change, the rate of exchange rate pass-through is decreasing in quality in high income countries, yet increasing in quality in low-income countries. We then document that these predictions receive empirical support in a dataset of prices and quality in the European car industry.

Suggested Citation

  • Auer, Raphael & Chaney, Thomas & Sauré, Philip, 2014. "Quality Pricing-to-Market," CEPR Discussion Papers 10053, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:10053
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    Cited by:

    1. Bonadio, Barthélémy & Fischer, Andreas M & Sauré, Philip, 2016. "The speed of the exchange rate pass-through," CEPR Discussion Papers 11195, C.E.P.R. Discussion Papers.
    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. Auer, Raphael & Sauré, Philip, 2014. "Spatial Competition in Quality," CEPR Discussion Papers 10027, C.E.P.R. Discussion Papers.
    4. Auer, Raphael A. & Sauré, Philip, 2017. "Dynamic entry in vertically differentiated markets," Journal of Economic Theory, Elsevier, vol. 167(C), pages 177-205.
    5. repec:oup:restud:v:85:y:2018:i:1:p:475-510. is not listed on IDEAS
    6. Javier Cravino & Andrei A. Levchenko, 2017. "The Distributional Consequences of Large Devaluations," American Economic Review, American Economic Association, vol. 107(11), pages 3477-3509, November.
    7. repec:eee:inecon:v:110:y:2018:i:c:p:87-102 is not listed on IDEAS
    8. Raphael A. Auer, 2015. "Exchange Rate Pass‐Through, Domestic Competition, and Inflation: Evidence from the 2005–08 Revaluation of the Renminbi," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(8), pages 1617-1650, December.
    9. Razafindrabe, Tovonony M., 2016. "A multi-country DSGE model with incomplete exchange rate pass-through: An application for the Euro-area," Economic Modelling, Elsevier, vol. 52(PA), pages 78-100.
    10. Chen, Natalie & Juvenal, Luciana, 2016. "Quality, trade, and exchange rate pass-through," Journal of International Economics, Elsevier, vol. 100(C), pages 61-80.
    11. repec:fip:feddgm:00014 is not listed on IDEAS
    12. Raphael A. Auer, 2009. "Taste Heterogeneity, Trade, and the Within-Industry Home Market Effect," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 145(IV), pages 387-403, December.
    13. Raphael Auer, 2009. "Product Heterogeneity, Within-Industry Trade Patterns, and the Home Bias of Consumption?," Working Papers 09.05, Swiss National Bank, Study Center Gerzensee.
    14. Bonadio, Barthélémy & Fischer, Andreas M. & Saure, Philip, 2016. "The speed of exchange rate pass-through," Globalization and Monetary Policy Institute Working Paper 282, Federal Reserve Bank of Dallas.
    15. A. Auer, Raphael & Chaney, Thomas & Sauré, Philip, 2018. "Quality pricing-to-market," Journal of International Economics, Elsevier, vol. 110(C), pages 87-102.
    16. Raphael A. Auer, 2013. "Product Heterogeneity, Cross-Country Taste Differences, and the Consumption Home Bias," Working Papers 13.01, Swiss National Bank, Study Center Gerzensee.
    17. Reto Foellmi & Christian Hepenstrick & Zweimüller Josef, 2018. "International Arbitrage and the Extensive Margin of Trade between Rich and Poor Countries," Review of Economic Studies, Oxford University Press, vol. 85(1), pages 475-510.
    18. Raphael Anton Auer & Philip Ulrich Sauré, 2011. "Spatial Competition in Quality, Demand-Induced Innovation, and Schumpeterian Growth," Working Papers 2011-10, Swiss National Bank.
    19. Raphael Schoenle & Raphael Auer, 2012. "Market Structure and Pass-Through," 2012 Meeting Papers 61, Society for Economic Dynamics.

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    Keywords

    exchange rate pass-through; intra-industry trade; monopolistic competition; pricing-to-market; vertical differentiation;

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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