Multinational Pricing: Lessons from IKEA

Recent research emphasizes the central role played by large firms with multiple products, both within country (Midrigan (2011), Bernard et al. (2011)) and in dominating international trade (Eaton et al. (2012)). In this paper, we shed light on the way in which a large multinational retailer operates in a setting characterized by multiple products distributed and prices in many countries. Using a novel dataset of products advertized in IKEA catalogs from seven countries between 2002 and 2015, we find that 1. Price spell lengths differ considerably across countries, 2. Price adjustments are not synchronized across countries, and 3. Price adjustment only slightly reduces law-of-one-price deviations. Then, we develop and test a partial equilibrium model of multinational pricing with variable markups. Using actual exchange rate data to simulate the model, we find that the calibration that works best implies persistent marginal costs and relatively stable markups: The model fails to replicate finding #1 and #2 if marginal costs are more volatile than exchange rates or if markups are too volatile.