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Pricing-to-Market Effects in Foreign Trade Prices. Evidence from a Cointegration Approach for Germany

Author

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  • Sabine Stephan

    () (IMK at the Hans Boeckler Foundation)

Abstract

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.

Suggested Citation

  • Sabine Stephan, 2005. "Pricing-to-Market Effects in Foreign Trade Prices. Evidence from a Cointegration Approach for Germany," IMK Working Paper 07-2005, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
  • Handle: RePEc:imk:wpaper:07-2005
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    File URL: http://www.boeckler.de/pdf/p_imk_wp_07_2005.pdf
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    References listed on IDEAS

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    1. Naug, Bjorn & Nymoen, Ragnar, 1996. " Pricing to Market in a Small Open Economy," Scandinavian Journal of Economics, Wiley Blackwell, vol. 98(3), pages 329-350.
    2. Menon, Jayant, 1995. " Exchange Rate Pass-Through," Journal of Economic Surveys, Wiley Blackwell, vol. 9(2), pages 197-231, June.
    3. Ketelsen, Uwe & Kortelainen, Mika, 1996. "The pass-through of exchange rate changes to import prices," Research Discussion Papers 26/1996, Bank of Finland.
    4. Paul Krugman, 1986. "Pricing to Market when the Exchange Rate Changes," NBER Working Papers 1926, National Bureau of Economic Research, Inc.
    5. 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 533-546, November.
    6. Warmedinger, Thomas, 2004. "Import prices and pricing-to-market effects in the euro area," Working Paper Series 299, European Central Bank.
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    Cited by:

    1. Stahn Kerstin, 2011. "Changes in Import Pricing Behaviour: Evidence for Germany," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 231(4), pages 522-545, August.

    More about this item

    Keywords

    export prices; import prices; exchange rate pass-through; pric- ing to market; error correction model;

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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