Working Paper: NBER ID: w15255
Authors: Emi Nakamura; Dawit Zerom
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.
Keywords: Incomplete Passthrough; Markup Adjustment; Coffee Industry
JEL Codes: E30; F10; L11; L16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| local costs (J30) | long-run passthrough (H22) |
| markup adjustment (D43) | long-run passthrough (H22) |
| menu costs (E64) | long-run passthrough (H22) |
| markup adjustment (D43) | price adjustments (L11) |
| commodity costs (Q02) | price adjustments (L11) |
| local costs (J30) | price adjustments (L11) |