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The Impact of Exchange Rate Fluctuations on Profit Margins: The UK Car Market, 1971–2002

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  • Francisco Requena-Silvente
  • James Walker

Abstract

We investigate the impact on profit margins of exchange rate fluctuations in order to examine optimal pricing policy by source countries in the UK car market. We first estimate a nested logit demand model of new cars to calculate model-specific profit margins. Next we use these estimates to analyse the pricing-to-market (PTM) behaviour of car importers and local producers. The results show that: (1) profit margins fell over the period 1971–2002 as the UK car market moved from being a concentrated market to a looser oligopoly structure; (2) there is a positive association between exchange rate changes and mark-up adjustments of imported cars. Following a 10% pound depreciation, exporters' profit margins declined by up to 4% and local producers' profit margins increased by up to 2%; (3) PTM behaviour is asymmetric between appreciations and depreciations in bilateral exchange rates.

Suggested Citation

  • Francisco Requena-Silvente & James Walker, 2007. "The Impact of Exchange Rate Fluctuations on Profit Margins: The UK Car Market, 1971–2002," Journal of Applied Economics, Taylor & Francis Journals, vol. 10(1), pages 213-235, May.
    • Handle: RePEc:taf:recsxx:v:10:y:2007:i:1:p:213-235
    DOI: 10.1080/15140326.2007.12040488
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    Cited by:

    1. Sánchez Navarro, Dennis, 2013. "Análisis de elasticidades en el mercado automotor colombiano (2009 - 2011) mediante un modelo logit anidado [Analysis Of Elasticity In Colombian Automotive Market (2009 - 2011) Through A Nested Log," MPRA Paper 46043, University Library of Munich, Germany.

    More about this item

    JEL classification:

    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
    • L6 - Industrial Organization - - Industry Studies: Manufacturing

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