Buyer Market Power and Exchange Rate Pass-through

Leticia Juarez

No 14128, IDB Publications (Working Papers) from Inter-American Development Bank

Abstract: I derive a model-based equation relating pass-through to buyer size and estimate it on the micro transaction level data for Colombia. I find that after an exchange rate shock, sellers connected to larger buyers face more moderate changes in their prices in the seller currency (i.e., lower exchange rate pass-through) than those connected to small buyers. Pass-through ranges from 1% for firms connected with the largest buyers and up to 17% for firms connected with the smallest buyers. I use the estimates from the empirical analysis to calibrate the model and propose a counterfactual where buyer market power is eliminated. Under this scenario, sellers' revenues increase; however, the price in seller currency is more responsive to exchange rate shocks. I study the impact of buyer market power on international price responses to exchange rate changes. In markets with high buyer concentration, larger foreign buyers secure marked-down prices that adjust flexibly to exchange rate shocks. Using a novel dataset of Colombian export transactions, I estimate an open economy oligopsony model with endogenous markdowns, revealing that sellers connected to larger buyers experience milder price changes (1% impact) compared to those connected with smaller buyers (15% impact). These findings highlight a trade-off: while larger buyers reduce seller revenues, they also reduce sellers' exposure to exchange rate volatility, emphasizing the strategic importance of buyer relationships in international markets.

Keywords: Market power; Oligopsony; market structure; Markdown; Exchange-rate pass-through (search for similar items in EconPapers)
JEL-codes: D43 E31 F31 F32 (search for similar items in EconPapers)
Date: 2025-06
New Economics Papers: this item is included in nep-com and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:idb:brikps:14128

DOI: 10.18235/0013557

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