6533b838fe1ef96bd12a52f9
RESEARCH PRODUCT
Quality pricing-to-market
Thomas ChaneyRaphael AuerRaphael AuerPhilip Saurésubject
Economics and Econometricsmedia_common.quotation_subjectjel:E41Product differentiationProduct differentiationMonopolistic competitionExchange rateExchange rate pass-through0502 economics and businessEconomicsPrice levels ; International tradejel:E3Pricing-to-marketQuality (business)Market power050207 economicsIndustrial organization050205 econometrics media_commonbiology05 social sciencesExchange-rate pass-throughCompetitor analysisbiology.organism_classification[SHS.ECO]Humanities and Social Sciences/Economics and FinanceMussaQualityjel:F12jel:L13jel:F4exchange rate pass-through; intra-industry trade; monopolistic competition; pricing-to-market; vertical differentiationFinancedescription
We examine firm's pricing-to-market decisions in vertically differentiated industries featuring a large number of firms that compete monopolistically in the quality space. Firms sell goods of heterogeneous quality to consumers with non-homothetic preferences that differ in their income and thus their marginal willingness to pay for quality increments. We derive closed-form solutions for the pricing game under costly international trade, thus establishing existence and uniqueness. We then examine how the interaction of good quality and market demand for quality affects firms' pricing-to-market decisions. The relative price of high quality goods compared to that of low quality goods is an increasing function of the income in the destination market. When relative costs change, the rate of exchange rate pass-through is decreasing in quality in high income countries, yet increasing in quality in low-income countries. We then document that these predictions receive empirical support in a dataset of prices and quality in the European car industry.
| year | journal | country | edition | language |
|---|---|---|---|---|
| 2014-07-01 |