Pricing-to-Market Effects in Foreign Trade Prices. Evidence from a Cointegration Approach for Germany
The article analyses the impact of exchange rate changes on German export and import prices. The analytical framework is a mark-up model which is based on the assumption that the markets under consideration are imperfectly competitive as well as segmented. Hence, firms will no longer set prices at marginal costs, but charge a mark-up on costs to earn above normal profits. The mark-up is not fixed, but can be adjusted in response to demand pressure and competitive pressure in the relevant market. Consequently, firms can practice price discrimination. We find evidence that domestic and foreign producers follow different price setting strategies: German exporters largely pass-through exchange rate changes; i.e. an appreciation of domestic currency is reflected in a significant increase in export prices (expressed in terms of foreign currency) indicating that German exporters have significant market power and/or face a fairly inelastic export demand curve. Foreign exporters to Germany, however, largely follow a pricing-to-market strategy; i.e. they absorb price increases due to an appreciation of foreign currency into their profit margins in order to stabilise export prices (expressed in terms of domestic currency). Thus, they can protect market shares in the highly competitive German market.
|Date of creation:||Dec 2005|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: +49 211 7778 234
Fax: +49 211 7778 4234
Web page: http://www.imk-boeckler.de
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Paul Krugman, 1986. "Pricing to Market when the Exchange Rate Changes," NBER Working Papers 1926, National Bureau of Economic Research, Inc.
- Athukorala, Premachandra & Menon, Jayant, 1995.
"Exchange Rates and Strategic Pricing: The Case of Swedish Machinery Exports,"
Oxford Bulletin of Economics and Statistics,
Department of Economics, University of Oxford, vol. 57(4), pages 533-46, November.
- Prema-chandra Athukorala & Jayant Manon, 1994. "Exchange Rates and Strategic Pricing: the Case of Swedish Machinery Exports," Working Papers 1994.08, School of Economics, La Trobe University.
- Menon, Jayant, 1995. " Exchange Rate Pass-Through," Journal of Economic Surveys, Wiley Blackwell, vol. 9(2), pages 197-231, June.
- Naug, Bjorn & Nymoen, Ragnar, 1996. " Pricing to Market in a Small Open Economy," Scandinavian Journal of Economics, Wiley Blackwell, vol. 98(3), pages 329-50.
- Ketelsen, Uwe & Kortelainen, Mika, 1996. "The Pass-Through of Exchange Rate Changes to Import Prices," Research Discussion Papers 26/1996, Bank of Finland.
- Warmedinger, Thomas, 2004. "Import prices and pricing-to-market effects in the euro area," Working Paper Series 0299, European Central Bank.
When requesting a correction, please mention this item's handle: RePEc:imk:wpaper:07-2005. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sabine Nemitz)
If references are entirely missing, you can add them using this form.