Quality pricing-to-market

Raphael Auer, Thomas Chaney and Philip Sauré

No 125, Globalization Institute Working Papers from Federal Reserve Bank of Dallas

Abstract: We document that in the European car industry, exchange rate pass-through is larger for low than for high quality cars. To rationalize this pattern, we develop a model of quality pricing and international trade based on the preferences of Mussa and Rosen (1978). Firms sell goods of heterogeneous quality to consumers that differ in their willingness to pay for quality. Each firm produces a unique quality of the good and enjoys local market power, which depends on the prices and qualities of its closest competitors. The market power of a firm depends on the prices and qualities of its direct competitors in the quality dimension. The top quality firm, being exposed to just one direct competitor, enjoys the highest market power and equilibrium markup. Because higher quality exporters are closer to the technological leader, markups are generally increasing in quality, exporting is relatively more profitable for high quality than for low quality firms, and the degree of exchange rate pass-through is decreasing in quality.

Keywords: Price levels; International trade (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-com, nep-eur, nep-int, nep-opm and nep-tre
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18)

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Working Paper: Quality pricing-to-market (2018)
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Working Paper: Quality Pricing-to-Market (2012)
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