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

Beverly Lapham and Danny Leung

No 707, 2006 Meeting Papers from Society for Economic Dynamics

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.

Keywords: Exchange Rate Pass-Through; Strategic Pricing (search for similar items in EconPapers)
JEL-codes: F12 F31 (search for similar items in EconPapers)
Date: 2006
New Economics Papers: this item is included in nep-cba and nep-ifn
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