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Market Structure and Exchange Rate Pass-Through

Raphael Auer and Raphael Schoenle

No 10585, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 micro-data from U.S. import prices, 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 competitor prices. Second, the response of import Prices to exchange rate changes is U-shaped in market share while it is hump-shaped in response to competitor prices. 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 play approximately equally important roles in determining pass-through but also partly offset each other. This suggests that equilibrium feedback effects in 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: exchange rate pass-through; price complementarities; price setting; U.S. import prices (search for similar items in EconPapers)
JEL-codes: E3 E31 F41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-com, nep-mac, nep-mon and nep-opm
Date: 2015-05
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Related works:
Journal Article: Market structure and exchange rate pass-through (2016) 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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