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Market structure and exchange rate pass-through

Raphael Auer and Raphael S. Schoenle

Journal of International Economics, 2016, vol. 98, issue C, 60-77

Abstract: We study firm-level pricing behavior through the lens of exchange rate pass-through and provide new evidence on how firm-level market shares and price complementarities affect pass-through decisions. Using U.S. import price micro data, we identify two facts: First, exactly the firms that react the most with their prices to changes in their own costs are also the ones that react the least to changing prices of competing importers. Second, the response of import prices to exchange rate changes is U-shaped in our proxy for market share while it is hump-shaped in response to the prices of competing importers. We show that both facts are consistent with a model based on Dornbusch (1987) that generates variable markups through a nested-CES demand system. Finally, based on the model, we find that direct cost pass-through and price complementarities among importers play approximately equally important roles in determining pass-through but also partly offset each other. This suggests that equilibrium feedback effects in import pricing are large. Omission of either channel in an empirical analysis results in a failure to explain how market structure affects price-setting in industry equilibrium.

Keywords: Price setting; Exchange rate pass-through; U.S. import prices; Market structure; Price complementarities (search for similar items in EconPapers)
JEL-codes: D24 E3 E31 F14 F41 L60 (search for similar items in EconPapers)
Date: 2016
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Related works:
Working Paper: Market Structure and Exchange Rate Pass-Through (2015) Downloads
Working Paper: Market Structure and Exchange Rate Pass-Through (2013) Downloads
Working Paper: Market structure and exchange rate pass-through (2012) Downloads
Working Paper: Market Structure and Exchange Rate Pass-Through (2012) Downloads
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