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Market Structure and Pass-Through

Author

Listed:
  • Raphael Schoenle

    (Brandeis University)

  • Raphael Auer

    (Swiss National Bank)

Abstract

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.

Suggested Citation

  • Raphael Schoenle & Raphael Auer, 2012. "Market Structure and Pass-Through," 2012 Meeting Papers 61, Society for Economic Dynamics.
  • Handle: RePEc:red:sed012:61
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    File URL: https://economicdynamics.org/meetpapers/2012/paper_61a.pdf
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    References listed on IDEAS

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    1. 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.
    2. Baxter, Marianne & Landry, Anthony E., 2012. "IKEA: product, pricing, and pass-through," Proceedings, Federal Reserve Bank of San Francisco, issue Nov, pages 1-32.
    3. Emi Nakamura & Dawit Zerom, 2010. "Accounting for Incomplete Pass-Through," Review of Economic Studies, Oxford University Press, vol. 77(3), pages 1192-1230.
    4. Devereux, Michael B. & Engel, Charles & Storgaard, Peter E., 2004. "Endogenous exchange rate pass-through when nominal prices are set in advance," Journal of International Economics, Elsevier, vol. 63(2), pages 263-291, July.
    5. Nakamura, Emi & Zerom, Dawit, 2008. "Accounting for Incomplete Pass-Through," MPRA Paper 14389, University Library of Munich, Germany.
    6. A. Auer, Raphael & Chaney, Thomas & Sauré, Philip, 2018. "Quality pricing-to-market," Journal of International Economics, Elsevier, vol. 110(C), pages 87-102.
    7. Arpita Chatterjee & Rafael Dix-Carneiro & Jade Vichyanond, 2013. "Multi-product Firms and Exchange Rate Fluctuations," American Economic Journal: Economic Policy, American Economic Association, vol. 5(2), pages 77-110, May.
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    11. Raphael A. Auer, 2015. "Exchange Rate Pass‐Through, Domestic Competition, and Inflation: Evidence from the 2005–08 Revaluation of the Renminbi," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(8), pages 1617-1650, December.
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    18. repec:hrv:faseco:32116841 is not listed on IDEAS
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    Cited by:

    1. repec:ecb:ecbwps:20141801 is not listed on IDEAS
    2. di Mauro, Filippo & Demian, Calin-Vlad, 2015. "The exchange rate, asymmetric shocks and asymmetric distributions," Working Paper Series 1801, European Central Bank.
    3. Maria V. Sokolova, 2015. "Strategic Currency Choice in International Trade," CESifo Working Paper Series 5574, CESifo Group Munich.

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