Pricing-to-market, Trade Policy, and Market Power

This paper studies the determinants of pricing-to-market at the firm-level, with a particular focus on the role of firm-specific and policy-induced market power. We use a large dataset containing export values and quantities by product and destination for all exporting firms in 12 developing and emerging countries, over several years. We first show that firms in our sample do price to market, i.e. significantly adjust their unit values in home currency in response to exchange-rate variations. The extent of pricing-to-market is quantitatively limited but highly significant and homogenous across origin countries despite their very different levels of development. We then study how firm performance and trade policy affect pricing-to-market at the firm-level. We find that within a given origin-destination-product cell, large, high-performance exporters price more to market. More importantly, we identify significant effects of trade-policy instruments on pricing-to-market: Higher import tariffs on a destination market are associated with less pricing-to-market, whereas non-tariff measures are associated with more. These results are consistent with models where pricing-to-market is increasing in firm size and market share, and suggest that trade policy has deep effects on market power, the direction of which depends on the type of instrument used.