This paper investigates the pricing-to-market (PTM) behaviour of Italian exporting firms, using quarterly survey data by sector and by region over the period 1999q1-2005q2. A partial equilibrium imperfect competition model provides the structure according to which the orthogonality of structural shocks is derived. Impulse-response analysis shows non-negligible reactions of exportdomestic price margins to unanticipated changes in cost competitiveness and in foreign and domestic demand levels, even though these effects appear to be of a transitory nature. For the period 1999-2001 a typical PTM behaviour emerges, while during the most recent years favourable foreign demand conditions allowed firms to increase their export-domestic price margins in face of a strong deterioration of their cost competitiveness. Macroeconomic implications of the observed PTM behaviour are also discussed. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59
IntroductionA large body of empirical studies shows that price differentiation across destination markets is the rule, rather than the exception, in the pricing behaviour of exporters of industrial countries.
1Exchange rate swings induce firms, endowed with some degree of market power, to adopt optimal (short run) price strategies, consisting in pricing the same good differently according to the markets where it is sold. Dornbusch (1987) investigates this phenomenon drawing on models of industrial organization, while Krugman (1987) formalizes it with the concept of pricing-to-market (PTM): if the domestic currency appreciates, a firm can react by reducing the domestic currency price of the good sold abroad to restrain the rise of the corresponding foreign price and the consequent fall of the (volume) market share. Motives behind the attempt at limiting the market share loss relate to the long-run investment made to establish in the market and the adjustment costs the firm has to incur when reducing volume of sales (these may be both reputation/brandswitching costs, as in Froot and Klemperer, 1989, and proper fixed costs in entering and exiting the market, as in Kasa, 1992). Relevant macroeconomic consequences of PTM are incomplete exchange rate pass-through (ERPT) and deviations from the law of one price (LOP), such that the classical textbook reaction of the current account to exchange rate modifications (based on the Marshall-Lerner requirements on export and import price elasticities) can be considerably diluted.Irrespective of whether a general equilibrium framework (Betts and Devereux, 1996, among others) or a partial equilibrium model is concerned (Dornbusch, 1987;Krugman, 1987;Marston, 1990), necessary conditions for price discrimination, consequent on exchange rate movements, involve market-structure characteristics, functional forms of demand faced by firms in the various destination markets and...