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

Atkeson, Andrew; Burstein, Ariel

doi:10.21034/sr.404

Cited by 126 publications

(280 citation statements)

References 29 publications

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“…Importantly, we show that our model with product replacements maps directly into standard general equilibrium models that abstract from product replacements. 5 Our adjusted pass-through estimates line up well with the implications of leading general equilibrium models such as Corsetti and Dedola (2005), Atkeson and Burstein (2008) and Drozd and Nosal (2011), which imply longrun pass-through between 0.7 and 0.9. 6 Our adjustment can also be applied to measures of passthrough based on the bilateral exchange rate.…”

Section: Introductionsupporting

confidence: 66%

Lost in Transit: Product Replacement Bias and Pricing to Market

Nakamura

Steinsson

2009

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The microdata underlying U.S. import and export price indexes exhibit frequent product turnover and highly rigid prices. As a consequence, 40% of products are replaced before a single price change is observed and 70% are replaced after two price changes or less. An aggregate price index that focuses on price changes for identical items over time may, therefore, miss an important component of price adjustment occuring at the time of product replacements. We provide a model of this "product replacement bias" and quantity its importance using U.S. microdata on improt and export prices. We show that, accounting for product replacement bias, long-run exchange rate "pass-through" into U.S. import and export price indexes is almost twice as high as conventional estimates suggest, and changes in the terms of trade are roughly 75% more volatile. Our adjustment makes pass-through statistics easier to account for with existing general equilibrium models. (including the U.S. import and export price indexes) are close approximations of a "matchedmodel index," in which all price changes used to construct the index are for identical items and product replacements are "linked-into" the index; meaning that the price comparison between the first observation of the new product and the last observation of the old product is dropped when changes in the index are calculated. 2 A matched model index will remain constant throughout in our example since prices only change at the time of product replacements and price comparisons between old and new products are dropped when the price index is constructed. Estimates of exchange rate pass-through using this price index will yield zero pass-through irrespective of what the true degree of pass-through is. 3While this is obviously an extreme example, it captures important features of the actual data underlying the U.S. import and export price indexes. Price rigidity and frequent product turnover imply that about 40% of expenditure weighted price series in these data have no price changes and roughly 70% have two price changes or less. 4 Even products that do have price changes while they are in the index, typically exit the index after a prolonged spell of price rigidity. If the prices of new products entering the index have already adjusted to exchange rate movements over this interval (as in our simple example above), the response of these prices to movements in exchange rates over this interval will be "lost in transit" (i.e., neither picked up by an observed price change of the exiting nor entering products). In this case, the price index will never fully reflect the true comovement of prices and exchange rates, even in the long run.We develop a model of this "product replacement bias" and show how it depends on observable features of price data. We estimate our model using BLS micro-data on import and export prices.Our "corrected" measure implies that pass-through of changes in the trade-weighted U.S. exchange rate into U.S. import prices for the period 1982-2007 was 0.64-almost twice as...

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Section: Introductionsupporting

confidence: 66%

Lost in Transit: Product Replacement Bias and Pricing to Market

Nakamura

Steinsson

2009

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“…8 For our purposes, scanner data such as those used by Bai and Stumpner (2018) suffer from certain drawbacks: (a) the sample covers consumer packaged goods (about 10% of total expenditures) and is not representative of several important Second, our estimates of the benefits of trade with China for consumers through lower prices complement a large literature that has documented adverse effects for employment (e.g., Autor et al (2013), Autor et al (2014), Pierce and Schott (2016a) and Bloom et al (2019)), mortality (Pierce and Schott (2016b)), marriage, fertility and children's living circumstances (Autor et al (2018)), domestic innovation and investment and Autor et al (2019)), and political polarization (Autor et al (2016)). Third, by showing importance of the "pro-competitive effects of trade" to explain the observed price response, our paper is part of a large literature that has estimated the empirical relationship between international trade and markups (e.g., Levinsohn (1993), Krishna and Mitra (1998), Nakamura and Zerom (2010), Feenstra and Weinstein (2017), Arkolakis et al (2018), Auer et al (2018) and Amiti et al (2018b)) and that has examined the extent to which opening up to trade may reduce markup distortions (e.g., Brander and Krugman (1983), Atkeson and Burstein (2008), Epifani and Gancia (2011), Edmond et al (2015), Feenstra (2018), and Impullitti and Licandro (2018)). Finally, our findings speak to a growing literature on the distributional effects of trade via the expenditure channel (e.g., Porto (2006) and He (2018), and the aforementioned studies).…”

Section: Indistinguishablementioning

confidence: 99%

“…With constant markups, the markup is inelastic and we obtain that Γ i j = Γ −i j = 0. With oligopolistic competition (e.g., Krugman (1979) and Atkeson and Burstein (2008)), Γ i and Γ −i are increasing in the firm's market share. Under relatively mild assumptions about the demand system, Amiti et al (2018b) show that Γ i j = Γ −i j .…”

Section: Ivd the Role Of Changes In Markupsmentioning

confidence: 99%

What Are the Price Effects of Trade? Evidence From the U.S. and Implications for Quantitative Trade Models

Jaravel

Sager

2018

SSRN Journal

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This paper finds that U.S. consumer prices fell substantially due to increased trade with China. With comprehensive price micro-data and two complementary identification strategies, we estimate that a 1pp increase in import penetration from China causes a 1.91% decline in consumer prices. This price response is driven by declining markups for domestically-produced goods, and is one order of magnitude larger than in standard trade models that abstract from strategic price-setting. The estimates imply that trade with China increased U.S. consumer surplus by about $400,000 per displaced job, and that product categories catering to low-income consumers experienced larger price declines. potential omitted variable biases and reverse causality. For example, China has a comparative advantage in specific product categories that may be on different inflation trends, such as consumer electronics or apparel. To overcome this challenge we use two complementary research designs borrowed from recent work by Pierce and Schott (2016a) and Autor et al. (2014), who study the consequences of trade with China on employment across U.S. industries. 2 Pierce and Schott (2016a) leverage a change in U.S. trade policy passed by Congress in October 2000, which eliminated potential tariff increases on Chinese imports. This research design uses transparent policy variation and lends itself to sharp tests for pretrends, but the effects of changes in policy uncertainty may differ from those of more common permanent changes in tariffs (e.g., Handley and Limão (2017)). To gauge the stability and generalizability of our main estimates, we also use the empirical strategy of Autor et al. (2014), who instrument for changes in import penetration from China across U.S. industries with contemporaneous changes observed in eight comparable economies. 3To assess the plausibility of a causal interpretation of our estimates, we implement several falsification and robustness tests. The results all support the validity of the exclusion restrictions. First, for each of the two instruments, we implement pre-trend tests and consider alternative specification choices, with different sets of fixed effects, time-varying controls and sample restrictions. There are no pre-trends and the estimated price effect is stable across specifications. Second, we study the sensitivity of our baseline estimate to aggregation choices by aggregating our data to the level of broader industries (as defined by the BEA's input-output table), and we use alternative measures of changes in import penetration from China (including or excluding retail margins, and accounting for changes in trade with trading partners of the U.S. other than China). We find that the estimated price response remains stable. Third, with the instrument from Pierce and Schott (2016a), we implement a stringent triple-difference test using price data from France. We find that there is no similar reaction of prices in France, where there was no policy change. Finally, using both instruments jointly, we run the tes...

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“…This result gains further importance in light of the overwhelming empirical evidence in support of the existence of market segmentation across countries (see, for example, Atkeson and Burstein [] and Knetter [, ] for evidence of price discrimination by exporting firms across different destination countries) . Moreover, the majority of cross‐border mergers during the last two decades have been realized within service industries such as financial services, where market segmentation and price discrimination prevail (see Section VI for further details).…”

Section: Introductionmentioning

confidence: 93%

“…Atkeson and Burstein [] use aggregate price data from exporting manufacturing firms in the U.S., the U.K., Japan, Germany, France, Italy and Canada for the period 1985–2006. Knetter [, ] uses the annual value and quantity of exports to selected destination countries for a number of seven‐digit industries in four source countries: the U.S., the U.K., Japan, and Germany, for the period 1975–1987.…”

mentioning

confidence: 99%

Cross‐Border Mergers and Market Segmentation

Chaudhuri

2014

The J Industrial Economics

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This paper shows that cross‐border mergers are more likely to occur in industries which serve multiple segmented markets rather than a single integrated market, given that cost functions are strictly convex. The product price rises in the market where an acquisition is made but falls in the other, decreasing the acquisition price of other firms (in contrast to the results in the existing merger literature on integrated markets). Although the sum of consumer surplus across the countries may rise in response to a given acquisition, one of the countries gains at the expense of the other.

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

Cited by 126 publications

References 29 publications

Lost in Transit: Product Replacement Bias and Pricing to Market

Lost in Transit: Product Replacement Bias and Pricing to Market

What Are the Price Effects of Trade? Evidence From the U.S. and Implications for Quantitative Trade Models

Cross‐Border Mergers and Market Segmentation

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