International Shocks, Variable Markups, and Domestic Prices

Mary Amiti, Oleg Itskhoki, Jozef Konings

Research output: Contribution to journalArticle

5 Citations (Scopus)

Abstract

How strong are strategic complementarities in price setting across firms? In this article, we provide a direct empirical estimate of firms' price responses to changes in competitor prices. We develop a general theoretical framework and an empirical identification strategy, taking advantage of a new micro-level dataset for the Belgian manufacturing sector. We find strong evidence of strategic complementarities, with a typical firm adjusting its price with an elasticity of 0.4 in response to its competitors' price changes and with an elasticity of 0.6 in response to its own cost shocks. Furthermore, we find evidence of substantial heterogeneity in these elasticities across firms. Small firms exhibit no strategic complementarities in price setting and complete cost pass-through. In contrast, large firms exhibit strong strategic complementarities, responding to both competitor price changes and their own cost shocks with roughly equal elasticities of around 0.5. We show that this pattern of heterogeneity in markup variability across firms is important for explaining the aggregate markup response to international shocks and the observed low exchange rate pass-through into domestic prices.

Original languageEnglish
Pages (from-to)2356-2402
Number of pages47
JournalReview of Economic Studies
Volume86
Issue number6
DOIs
Publication statusPublished - Nov 1 2019

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Keywords

  • D22
  • E31
  • Exchange rate
  • F31
  • Imported inputs
  • Markups
  • Pass-through
  • Price setting
  • Strategic complementarities

ASJC Scopus subject areas

  • Economics and Econometrics

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