The Impact of Exchange Rate Fluctuations on Profit Margins: The UK Car Market, 1971–2002

Francisco Requena-Silvente and James Walker
Authors registered in the RePEc Author Service: Francisco Requena Silvente

Journal of Applied Economics, 2007, vol. 10, issue 1, 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.

Date: 2007
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DOI: 10.1080/15140326.2007.12040488

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