Pricing-to-Market: Evidence From Plant-Level Prices

Abstract

We use micro data on Irish producer prices to provide clean evidence on pricing-tomarket across a broad range of manufacturing sectors. We have monthly observations on prices charged by the same plant for the same product to buyers in Ireland and the UK, two markets segmented by variable exchange rates. Assuming that relative marginal cost is constant across markets within a plant and a product, this allows us to observe the behavior of the markup in the UK market relative to the home market. To identify pricing-to-market that goes beyond what is mechanically due to price stickiness, we condition on episodes where prices change. When prices are invoiced in local currency, conditional on prices changing, the ratio of the markup in the foreign market to the markup in the home market increases one-for-one with depreciations of home against foreign currency and decreases one-for-one with appreciations of home against foreign currency, a very particular form of pricing-to-market.

Quality, Trade, and Exchange Rate Pass-Through

“…The large degree of pass-through we …nd for the wine industry is therefore consistent with the …ndings of other papers that use …rm-level data for the whole manufacturing sector. For instance, pass-through is estimated at 92 percent for French exporters (Berman et al, 2012), 94 percent for Chinese exporters (Li et al, 2012), 77 percent for Brazilian exporters (Chatterjee et al, 2013), 86 percent for Danish exporters (Fosse, 2012), and at 79 percent for Belgian exporters (Amiti et al, 2012).…”

“…In the presence of additive local distribution costs paid in the currency of the importing country, the model shows that the demand elasticity perceived by the …rm falls with a real depreciation and with quality. As a result, following a change 1 For a survey of the literature, see Goldberg and Knetter (1997) and Burstein and Gopinath (2013). 2 Incomplete pass-through therefore leads to deviations from the Law of One Price.…”

“…5 Many papers examine the response of import prices (which include transportation costs) or consumer prices (which further include distribution costs) to changes in currency values (e.g., Goldberg, 2005, 2010). For earlier evidence from the perspective of exporters, see Goldberg and Knetter (1997), Kasa (1992), or Knetter (1989Knetter ( , 1993. For more recent evidence, see Berman, Martin, and Mayer (2012), Chatterjee, Dix-Carneiro, and Vichyanond (2013), or Amiti, Itskhoki, and Konings (2012), among others.…”

“…Consistent with our paper, these authors predict that pass-through should be higher for lower quality goods. 8 Auer and Chaney (2009) do not …nd any evidence for such a relationship using import prices data for the US, 7 Other …rm-level studies include Campos (2010), Fitzgerald andHaller (2013), Fosse (2012), Li, Ma, Xu, andXiong (2012), andStrasser (2013). 8 Basile, de Nardis, and Girardi (2012) develop a model based on Melitz and Ottaviano (2008) and predict that exchange rate pass-through is lower for higher quality goods.…”

Menu Costs, Trade Flows, and Exchange Rate Volatility

“…The extent of imported intermediates is found to be important in explaining some of this low pass-through, and this mechanism will be included in the model discussed in Section 2. Fitzgerald and Haller (2009) find that among exporters in Ireland, firms which invoice in the destination currency avoid passing through changes in the exchange rate and implicitly adjust their markups instead. On the theoretical side, Atkeson and Burstein (2008) show how firms with greater market share may optimally choose to have lower pass through; de Blas and Russ (2012) analytically characterize firm markup behavior with a finite number of firms.…”