Macroeconomics of International Price Discrimination

By Giancarlo Corsetti, Luca Dedola. Social Science Research Network, 2002

191 citations recorded by the source corpus.

This Paper builds a baseline two-country model of real and monetary transmission in the presence of optimal international price discrimination by firms. Distributing traded goods to consumers requires non-tradables, intensive in local labour. Because of distributive trade the price elasticity of demand depends on country-specific shocks to productivity and the exchange rate. Hence, within limits dictated by the possibility of arbitrage, profit-maximizing monopolistic firms drive a wedge between prices across countries at both wholesale and retail level. Optimal pricing thus results in possibly large deviations from the law of one price and incomplete pass-through on import prices. Consistent with the received wisdom on international transmission, nominal and real depreciations worsens the terms of trade. In general, the nominal and real exchange rate are more volatile than fundamentals, and large movements in the international prices translate into small changes in consumption, employment and the price level. Finally, we provide an example showing that international policy cooperation may be redundant even when asset trading is ruled out, despite incomplete pass-through and less than optimal risk sharing.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/091d6af194088298d52031a0054dd293dbf2101d

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Citations in the corpus

Why do Consumer Prices React Less than Import Prices to Exchange Rates (2002, background): “4. Corsetti and Dedola (2002) also consider a model in which the pass-through to consumer prices is lower than to import prices as a result of local distribution costs.”
Smooth Landing or Crash? Model-Based Scenarios of Global Current Account Rebalancing (2005, background): “See, for example, Engel (1993), Engel and Rogers (1996), Rogoff (1996), Obstfeld and Rogoff (2000a,b), Devereux and Engel (2002), Corsetti and Dedola (2002), and Choudhri, Faruqee, and Hakura (2005).”
Understanding Movements in Aggregate and Product-Level Real-Exchange Rates ∗ (2008, background): “This setting was originally explored in Corsetti and Dedola (2005).”
International Risk-Sharing and the Transmission of Productivity Shocks (2004, unknown): “[17] Corsetti Giancarlo and Luca Dedola [2002], Macroeconomics of International Price Discrimination, European Central Bank Working Paper No.”
Price Setting and Exchange Rate Pass-Through: Theory and Evidence (2002, unknown): “Reproduction for educational and non-commercial purposes is permitted provided that the source is acknowledged.”
International Prices and Exchange Rates (2013, unknown): “Corsetti and Dedola (2005) show that the presence of additive distribution costs can lead to variable markups at the producer level.”
Equilibrium Exchange Rates in Transition Economies: Taking Stock of the Issues (2006, unknown): “The non-tradable component of tradable prices, which mostly incorporates the costs of distribution services (also called non-tradable processing component), which varies across countries, is a big reason for firms to charge different prices in different countries all things being equal (Corsetti and”
SIGMA: a new open economy model for policy analysis (2005, unknown): “While some microfounded models can account for long-run passthrough that is below unity, including models with a distribution sector for retail goods as in Corsetti and Dedola (2003), and Corsetti, Dedola, and Leduc (2005), such models do not allow enough variation in desired markups to come close t”
Accounting for Incomplete Pass-Through (2009, methodology): “The remaining “local costs” of production play an important role in determining pass-through behavior since they drive a wedge between fluctuations in imported costs and the marginal cost of production (Sanyal and Jones, 1982; Burstein, Neves and Rebelo, 2003; Corsetti and Dedola, 2004).”