Pricing to Market as a Revelator of Policy-Induced Market Power

Olivier Cadot

Papers from World Trade Institute

Abstract: This paper studies the determinants of pricing-to-market at the firm level on a sample of developing-country exporters, focusing on how it interacts with firm heterogeneity and trade policy. We use a large cross-country, firm-level panel with export values and quantities by product and destination for all exporting firms in 12 developing and emerging countries for several years. We find that firms in our sample do price to market, i.e. significantly adjust unit values in home currency to exchange-rate variations. The extent of pricing-to-market is quantitatively small but highly significant and homogenous across origin countries. We also find that large, high performance exporters price more to market than smaller ones. More importantly, we identify significant effects of trade policy instruments on pricing-to-market: Higher import tariffs are associated with less pricing to market, whereas non-tariff measures are associated with more. These results suggest that trade policy has deep effects on market power, the direction of which depends on the type of instrument used.

Date: 2014-05-15
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