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Market Structure and Pass-Through

  • Raphael Schoenle

    (Brandeis University)

  • Raphael Auer

    (Swiss National Bank)

In this paper, we examine the extent to which market structure and the way in which it affects pricing decisions of profit-maximizing firms can explain incomplete exchange rate pass- through. To this purpose, we evaluate how pass-through rates vary across trade partners and sectors depending on the mass and size distribution of firms affected by a particular exchange rate shock. In the first step of our analysis, we decompose bilateral exchange rate movements into broad US Dollar (USD) movements and trade-partner currency (TPC) movements. Using micro data on US import prices, we show that the pass-through rate following USD movements is up to four times as large as the pass-through rate following TPC movements and that the rate of pass-through following TPC movements is increasing in the trade partner's sector-specific market share. In the second step, we draw on the parsimonious model of oligopoly pricing featuring variable markups of Dornbusch (1987) and Atkeson and Burstein (2008) to show how the distribution of firms' market shares and origins within a sector affects the trade-partner specific pass-through rate. Third, we calibrate this model using our exchange rate decomposition and information on the origin of firms and their market shares. We find that the calibrated model can explain a substantial part of the variation in import price changes and pass-through rates across sectors, trade partners, and sector-trade partner pairs.

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File URL: https://economicdynamics.org/meetpapers/2012/paper_61a.pdf
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Paper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 61.

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Date of creation: 2012
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Handle: RePEc:red:sed012:61
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
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  1. Christopher J. Gust & Sylvain Leduc & Nathan Sheets, 2008. "The adjustment of global external balances: does partial exchange rate pass-through to trade prices matter?," Working Paper Series 2008-16, Federal Reserve Bank of San Francisco.
  2. Robert C. Feenstra & Joseph E. Gagnon & Michael M. Knetter, 1993. "Market share and exchange rate pass-through in world automobile trade," International Finance Discussion Papers 446, Board of Governors of the Federal Reserve System (U.S.).
  3. Michael B. Devereux & Charles Engel & Peter E. Storgaard, 2003. "Endogenous Exchange Rate Pass-through when Nominal Prices are Set in Advance," NBER Working Papers 9543, National Bureau of Economic Research, Inc.
  4. Jiawen Yang, 1992. "Exchange Rate Pass-Through in U.S. Manufacturing Industries," Working Papers 92-28, New York University, Leonard N. Stern School of Business, Department of Economics.
  5. Emi Nakamura & Dawit Zerom, 2010. "Accounting for Incomplete Pass-Through," Review of Economic Studies, Oxford University Press, vol. 77(3), pages 1192-1230.
  6. Bacchetta, Philippe & van Wincoop, Eric, 2003. "Why do Consumer Prices React Less than Import Prices to Exchange Rates?," CEPR Discussion Papers 3702, C.E.P.R. Discussion Papers.
  7. Michael, Panos & Nobay, A Robert & Peel, David A, 1997. "Transactions Costs and Nonlinear Adjustment in Real Exchange Rates: An Empirical Investigation," Journal of Political Economy, University of Chicago Press, vol. 105(4), pages 862-79, August.
  8. Auer, Raphael & Chaney, Thomas & Sauré, Philip, 2014. "Quality Pricing-to-Market," CEPR Discussion Papers 10053, C.E.P.R. Discussion Papers.
  9. Stefania Garetto, 2014. "Firms’ Heterogeneity and Incomplete Pass-Through," Boston University - Department of Economics - Working Papers Series WP2014-006, Boston University - Department of Economics.
  10. Arpita Chatterjee & Rafael Dix-Carneiro & Jade Vichyanond, 2012. "Multi-Product Firms and Exchange Rate Fluctuations," Discussion Papers 2012-29, School of Economics, The University of New South Wales.
  11. Emi Nakamura & Dawit Zerom, 2009. "Accounting for Incomplete Pass-Through," NBER Working Papers 15255, National Bureau of Economic Research, Inc.
  12. Anthony Landry & Marianne Baxter, 2013. "IKEA: Product, Pricing, and Pass-Through," 2013 Meeting Papers 1363, Society for Economic Dynamics.
  13. Mico Loretan, 2005. "Indexes of the foreign exchange value of the dollar," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Win, pages 1-8.
  14. Hellerstein, Rebecca, 2008. "Who bears the cost of a change in the exchange rate? Pass-through accounting for the case of beer," Journal of International Economics, Elsevier, vol. 76(1), pages 14-32, September.
  15. Paul Krugman, 1986. "Pricing to Market when the Exchange Rate Changes," NBER Working Papers 1926, National Bureau of Economic Research, Inc.
  16. Chen, Natalie & Imbs, Jean & Scott, Andrew, 2009. "The dynamics of trade and competition," Journal of International Economics, Elsevier, vol. 77(1), pages 50-62, February.
  17. Philippe Andrade & Martine Carré & Agnès Bénassy-Quéré, 2010. "TVA et taux de marge : une analyse empirique sur données d'entreprises," Working Papers 2010-30, CEPII research center.
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