Working Paper: CEPR ID: DP10585
Authors: Raphael Auer; Raphael Schoenle
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 passthrough; price complementarities; price setting; US import prices
JEL Codes: E3; E31; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| firm-level market shares (L19) | pricing behavior (D40) |
| cost changes (D24) | pricing behavior (D40) |
| competitor price changes (D41) | pricing behavior (D40) |
| own cost changes (D23) | competitor price changes (D41) |
| market share (L17) | response of import prices to exchange rate changes (F31) |
| market share (L17) | response to competitor prices (L11) |
| direct cost passthrough (H22) | passthrough rates (G19) |
| price complementarities (D10) | passthrough rates (G19) |
| direct cost passthrough + price complementarities (D10) | industry equilibrium pricing (D41) |