Accounting for Incomplete Pass-Through

Emi Nakamura and Dawit Zerom ()

No 15255, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Recent theoretical work has suggested a number of potentially important factors in causing incomplete pass-through of exchange rates to prices, including markup adjustment, local costs and barriers to price adjustment. We empirically analyze the determinants of incomplete pass-through in the coffee industry. The observed pass-through in this industry replicates key features of pass-through documented in aggregate data: prices respond sluggishly and incompletely to changes in costs. We use microdata on sales and prices to uncover the role of markup adjustment, local costs, and barriers to price adjustment in determining incomplete pass-through using a structural oligopoly model that nests all three potential factors. The implied pricing model explains the main dynamic features of short and long-run pass-through. Local costs reduce long-run pass-through (after 6 quarters) by a factor of 59% relative to a CES benchmark. Markup adjustment reduces pass-through by an additional factor of 33%, where the extent of markup adjustment depends on the estimated "super-elasticity" of demand. The estimated menu costs are small 0.23% of revenue) and have a negligible effect on long-run pass-through, but are quantitatively successful in explaining the delayed response of prices to costs. The estimated strategic complementarities in pricing do not, therefore, substantially delay the response of prices to costs. We find that delayed pass-through in the coffee industry occurs almost entirely at the wholesale rather than the retail level.

JEL-codes: E30 F10 L11 L16 (search for similar items in EconPapers)
Date: 2009-08
New Economics Papers: this item is included in nep-cba, nep-com, nep-ifn, nep-mac and nep-opm
Note: EFG IFM IO ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

Published as Emi Nakamura & Dawit Zerom, 2010. "Accounting for Incomplete Pass-Through," Review of Economic Studies, Wiley Blackwell, vol. 77(3), pages 1192-1230, 07.

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Journal Article: Accounting for Incomplete Pass-Through (2010)
Working Paper: Accounting for Incomplete Pass-Through (2008)
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