Macroeconomics of International Price Discrimination

This paper builds a baseline two-country model of real and monetary transmission in the presence of optimal international price discrimination by firms. Distributing traded goods to consumers requires nontradables, intensive in local labor. Because of distribution services, the price elasticity of demand is country-specific and depends on exchange-rate fluctuations. Hence, within limits dictated by the possibility of arbitrage, profit-maximizing monopolistic firms drive a wedge between prices across countries at both wholesale and retail level. Optimal price discrimination results in a muted response of import and consumer prices to exchange-rate movements. Despite low pass-through, a currency depreciation generally worsens the terms of trade, consistent with the possibility of expenditure-switching e.ects. We use our model to derive general equilibrium expressions for the exchange-rate pass-through as a function of fundamentals. Conditional pass-through varies depending on whether shocks are real or nominal, transitory or permanent, thus suggesting caution in deriving structural interpretations from average, unconditional estimates of price elasticities.