International Shocks, Variable Markups, and Domestic Prices
By M. Amiti, Oleg Itskhoki, Jozef Konings. The Review of Economic Studies, 2019
231 citations recorded by the source corpus.
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.
Subfields: Economics and Econometrics, Strategy and Management
View Paper: https://www.semanticscholar.org/paper/893861346c7421fee6efb16c4b5b5fa5d7f627db
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Citations in the corpus
- Market Power and Innovation in the Intangible Economy (2019, background): “Amiti et al. (2019) find a pass-through of markups to marginal cost shocks of -35% in their main results.”
- Exchange Rate Disconnect in General Equilibrium (2017, unknown): “…are given by pHt 5 ð1 2 aÞmct 1 apt and p*Ht 5 ð1 2 aÞðmct 2 etÞ 1 ap*t , (33) where a ∈ ½0, 1Þ represents the elasticity of strategic complementarities and (1 2 a) represents the (incomplete) cost pass-throughelasticity, both arising from variable markups (see Amiti, Itskhoki, and Konings 2019).”