International Shocks, Variable Markups, and Domestic Prices

Mary Amiti, Oleg Itskhoki and Jozef Konings

The Review of Economic Studies, 2019, vol. 86, issue 6, 2356-2402

Abstract: How strong are strategic complementarities in price setting across firms? In this article, we provide a direct empirical estimate of firms’ price responses to changes in competitor prices. We develop a general theoretical framework and an empirical identification strategy, taking advantage of a new micro-level dataset for the Belgian manufacturing sector. We find strong evidence of strategic complementarities, with a typical firm adjusting its price with an elasticity of 0.4 in response to its competitors’ price changes and with an elasticity of 0.6 in response to its own cost shocks. Furthermore, we find evidence of substantial heterogeneity in these elasticities across firms. Small firms exhibit no strategic complementarities in price setting and complete cost pass-through. In contrast, large firms exhibit strong strategic complementarities, responding to both competitor price changes and their own cost shocks with roughly equal elasticities of around 0.5. We show that this pattern of heterogeneity in markup variability across firms is important for explaining the aggregate markup response to international shocks and the observed low exchange rate pass-through into domestic prices.

Keywords: Price setting; Strategic complementarities; Markups; Pass-through; Imported inputs; Exchange rate (search for similar items in EconPapers)
JEL-codes: D22 E31 F31 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (149)

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Persistent link: https://EconPapers.repec.org/RePEc:oup:restud:v:86:y:2019:i:6:p:2356-2402.

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