Pricing-to-Market, Trade Costs, and International Relative Prices

Abstract

Data on international relative prices from industrialized countries show large and systematic deviations from relative purchasing power parity. We embed a model of imperfect competition and variable markups in some of the recently developed quantitative models of international trade to examine whether such models can reproduce the main features of the fluctuations in international relative prices. We find that when our model is parameterized to match salient features of the data on international trade and market structure in the US, it can reproduce deviations from relative purchasing power parity similar to those observed in the data because firms choose to price-to-market. We then examine how pricing-to-market depends on the presence of international trade costs and various features of market structure. * We thank George Alessandria, V.V. Chari, Doireann Fitzgerald, Mark Gertler, Jonathan Heathcote, Sam Kortum, Marc Melitz, John Rogers, and three anonymous referees for very useful comments and suggestions.† UCLA, Federal Reserve Bank of Minneapolis, and NBER. ‡ UCLA and NBER.

Trade Theory with Numbers: Quantifying the Consequences of Globalization

“…In recent work, Edmond, Midrigan, and Xu (2011) have used the model with Cournot competition developed by Atkeson and Burstein (2008) to study the magnitude of the gains from trade in economies with variable markups. When calibrating this model using data on manufacturing Taiwanese firms, they find large gains from trade, though the numbers vary depending on assumptions made on the correlation of productivity between Taiwanese and non-Taiwanese firms.…”

Fiscal Devaluations

“…For instance, our results generalize to the case of monopolistic competition with non-constant desired markups (e.g., as under Kimball, 1995, demand), as well as to the case of oligopolistic competition with strategic complementarities (e.g., as in Atkeson and Burstein, 2008). Departing from CES consumption aggregators and monopolistic competition substantially increases the notational burden, but leaves the analysis largely unchanged.…”

A state-dependent model of intermediate goods pricing

“…The model is a nested CES structure closely related to that used in Yang (1997) and more recently in Atkeson and Burstein (2008). An in…nitely lived representative consumer buys a continuum of …nal goods that are assembled by distributors from two inputs purchased at arm's length from upstream manufacturers.…”

“…A constant elasticity of substitution (CES) demand system would instead imply complete passthrough of permanent cost shocks at the time of a price change. 1 Third, the dynamic pricing problem is treated as a game between a …nite number of large …rms. Each …rm is strategic in that it actively considers and responds to each other …rm's pricing policy.…”

“…Each …rm is strategic in that it actively considers and responds to each other …rm's pricing policy. This is the mechanism through which the model generates synchronization in price changes even with idiosyncratic shocks: a …rm might change its price solely because it 1 A CES demand system can lead to incomplete passthrough at the time of a price change if adjustment is costly and the marginal cost shock is not permanent (mean reverting, for example). Motivated by the interpretation of these shocks as exchange rate movements, we instead focus on the case of permanent (or highly persistent) shocks.…”