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Quality Pricing-to-Market

Raphael Auer, Thomas Chaney () and Philip Sauré ()

No 657, BIS Working Papers from Bank for International Settlements

Abstract: This paper analyses firm's pricing-to-market decisions in vertically differentiated industries. We first present a model featuring firms that sell goods of heterogeneous quality levels to consumers who are heterogeneous in their income and thus their marginal willingness to pay for quality increments. We derive closed-form solutions for the unique pricing game under costly international trade. The comparative statics highlight how firms' pricing-to-market decisions are shaped by the interaction of consumer income and good quality. We derive two testable predictions. First, the relative price of high qualities compared to low qualities increases with the income of the destination market. Second, the rate of cost pass-through into consumer prices falls with quality if destination market income is sufficiently high. We present evidence in support of these two predictions based on a dataset of prices, sales, and product attributes in the European car industry.

Keywords: exchange rate pass-through; intra-industry trade; monopolistic competition; pricing-to-market; vertical differentiation (search for similar items in EconPapers)
JEL-codes: E3 E41 F12 F4 L13 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com, nep-ind, nep-int, nep-mac, nep-mkt and nep-opm
Date: 2017-08
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Related works:
Journal Article: Quality pricing-to-market (2018) Downloads
Working Paper: Quality Pricing-to-Market (2014) Downloads
Working Paper: Quality pricing-to-market (2012) Downloads
Working Paper: Quality Pricing-to-Market (2012) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:bis:biswps:657

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