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The impact of exchange rate fluctuations on profit margins: The UK car market, 1971-2002

Francisco Requena-Silvente () and James Walker ()
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Francisco Requena-Silvente: University of Valencia,

Authors registered in the RePEc Author Service: Francisco Requena Silvente ()

Journal of Applied Economics, 2007, vol. 10, 213-235

Abstract: We investigate the impact on profit margins of exchange rate fluctuations in order to examine optimal pricing policy by source countries in the UK car market. We first estimate a nested logit demand model of new cars to calculate model-specific profit margins. Next we use these estimates to analyse the pricing-to-market (PTM) behaviour of car importers and local producers. The results show that: (1) profit margins fell over the period 1971-2002 as the UK car market moved from being a concentrated market to a looser oligopoly structure; (2) there is a positive association between exchange rate changes and mark-up adjustments of imported cars. Following a 10% pound depreciation, exporters' profit margins declined by up to 4% and local producers' profit margins increased by up to 2%; (3) PTM behaviour is asymmetric between appreciations and depreciations in bilateral exchange rates.

Keywords: exchange rates; markup adjustment; pricing to market; cars (search for similar items in EconPapers)
JEL-codes: L2 L6 (search for similar items in EconPapers)
Date: 2007
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Handle: RePEc:cem:jaecon:v:10:y:2007:n:1:p:213-235