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Industry Restructuring, Mark-ups, and Exchange Rate Pass-Through

Author

Listed:
  • Beverly Lapham

    (Queen's University)

  • Danny Leung

Abstract

Consumer prices are not very responsive to movements in nominal exchange rates and their response has fallen considerably in Canada since the mid 1980s. This paper explores two of the most likely explanations for this decline in exchange rate pass-through to consumer prices: (1) lower inflation and (2) restructuring in the retail sector. We believe that both explanations are important but our focus in this paper is the latter explanation. We first present estimates which suggest that mark-ups in the retail sector in Canada have decreased while concentration has increased over this time period. We also discuss other trends in Canadian retailing which suggest considerable restructuring in this sector which have led to changes in the nature of competition. Based on this evidence, we argue that it is important to examine pass-through in industrial organization models with strategic elements. We present such a model which generates lower mark-ups, higher concentration, and lower exchange rate pass-through simultaneously.

Suggested Citation

  • Beverly Lapham & Danny Leung, 2006. "Industry Restructuring, Mark-ups, and Exchange Rate Pass-Through," 2006 Meeting Papers 707, Society for Economic Dynamics.
    • Handle: RePEc:red:sed006:707
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation

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