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Firms' heterogeneity, incomplete information, and pass-through

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  • Garetto, Stefania

Abstract

A large body of empirical work documents that prices of traded goods change by a smaller proportion than real exchange rates between the trading countries (incomplete pass-through). I present a Ricardian model of trade and international price-setting with heterogeneous firms, Bertrand competition and incomplete information. The model implies that: 1) firm-level pass-through is incomplete and a U-shaped function of firm-level productivity and market share; and 2) controlling for firm market share, producers operating under incomplete information, like for example new entrants in a market, exhibit lower pass-through rates than producers operating under complete information. Estimates from a panel data set of cars prices support the predictions of the model.

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  • Garetto, Stefania, 2016. "Firms' heterogeneity, incomplete information, and pass-through," Journal of International Economics, Elsevier, vol. 101(C), pages 168-179.
    • Handle: RePEc:eee:inecon:v:101:y:2016:i:c:p:168-179
    DOI: 10.1016/j.jinteco.2016.05.001
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    Cited by:

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    2. A. Auer, Raphael & Chaney, Thomas & Sauré, Philip, 2018. "Quality pricing-to-market," Journal of International Economics, Elsevier, vol. 110(C), pages 87-102.
    3. Michael Malenbaum, 2018. "Exchange Rate Pass-Through and the Role of Market Shares," Journal of Industry, Competition and Trade, Springer, vol. 18(2), pages 151-185, June.
    4. Kondo, Illenin O., 2018. "Trade-induced displacements and local labor market adjustments in the U.S," Journal of International Economics, Elsevier, vol. 114(C), pages 180-202.
    5. Devereux, Michael B. & Dong, Wei & Tomlin, Ben, 2017. "Importers and exporters in exchange rate pass-through and currency invoicing," Journal of International Economics, Elsevier, vol. 105(C), pages 187-204.
    6. Süleyman Hilmi Kal & Muhsin Çiftçi, 2022. "Market structure and exchange rate pass‐through in the Turkish manufacturing industry: Evidence from sectoral data," Bulletin of Economic Research, Wiley Blackwell, vol. 74(4), pages 995-1016, October.
    7. Jordi Jaumandreu & Shuheng Lin, 2018. "Prices under Innovation: Evidence from Manufacturing Firms," Working Papers 2019-07-04, Wang Yanan Institute for Studies in Economics (WISE), Xiamen University.

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    More about this item

    Keywords

    Heterogeneous firms; Incomplete information; Incomplete pass-through;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions

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