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Structural Estimation of Price Adjustment Costs in the European Car Market

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  • Carlos Noton

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Abstract

This paper characterizes the price adjustment costs that are consistent with observed price dynamics in the European car market. Using the methodology developed by Bajari, Benkard, and Levin (2007), I estimate a dynamic model of international multiproduct firms that set prices in different currencies while facing price adjustment costs. There are three main results. First, the incomplete degree of exchange rate pass-through can be explained by a sizable destination-currency cost component. Second, large price adjustment costs are not needed to rationalize the large degree of price inertia in a highly autocorrelated economic environment. In fact, small adjustment costs can rationalize the persistent prices observed. Third, the paper identi.es an unexplored temporal dimension of "pricing-to-market" behavior, that is the practice of setting prices differently across segmented markets. Estimates of the price adjustment cost suggest that a uniform cost structure is not consistent with the pricing behavior observed.

Suggested Citation

  • Carlos Noton, 2013. "Structural Estimation of Price Adjustment Costs in the European Car Market," Documentos de Trabajo 303, Centro de Economía Aplicada, Universidad de Chile.
  • Handle: RePEc:edj:ceauch:303
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    Cited by:

    1. Srisuma, Sorawoot, 2010. "Estimation of structural optimization models: a note on identification," LSE Research Online Documents on Economics 58071, London School of Economics and Political Science, LSE Library.

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    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure

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