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Quality pricing-to-market

Author

Listed:
  • Raphael Auer
  • Thomas Chaney
  • Philip Saure

Abstract

We document that in the European car industry, exchange rate pass-through is larger for low than for high quality cars. To rationalize this pattern, we develop a model of quality pricing and international trade based on the preferences of Mussa and Rosen (1978). Firms sell goods of heterogeneous quality to consumers that differ in their willingness to pay for quality. Each firm produces a unique quality of the good and enjoys local market power, which depends on the prices and qualities of its closest competitors. The market power of a firm depends on the prices and qualities of its direct competitors in the quality dimension. The top quality firm, being exposed to just one direct competitor, enjoys the highest market power and equilibrium markup. Because higher quality exporters are closer to the technological leader, markups are generally increasing in quality, exporting is relatively more profitable for high quality than for low quality firms, and the degree of exchange rate pass-through is decreasing in quality.

Suggested Citation

  • Raphael Auer & Thomas Chaney & Philip Saure, 2012. "Quality pricing-to-market," Globalization Institute Working Papers 125, Federal Reserve Bank of Dallas.
  • Handle: RePEc:fip:feddgw:125
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    Keywords

    Price levels; International trade;

    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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