Quality Pricing-to-Market

63 Pages Posted: 25 Sep 2014

See all articles by Raphael Auer

Raphael Auer

Swiss National Bank; Bank for International Settlements (BIS)

Thomas Chaney

SciencesPo - Sciences Po - Department of Economics; Centre for Economic Policy Research (CEPR)

Philip U. Sauré

Johannes Gutenberg University Mainz - Gutenberg School of Management and Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: July 2014

Abstract

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.

Keywords: exchange rate pass-through, intra-industry trade, monopolistic competition, pricing-to-market, vertical differentiation

JEL Classification: E3, E41, F12, F4, L13

Suggested Citation

Auer, Raphael and Chaney, Thomas and Sauré, Philip U., Quality Pricing-to-Market (July 2014). CEPR Discussion Paper No. DP10053, Available at SSRN: https://ssrn.com/abstract=2501526

Raphael Auer (Contact Author)

Swiss National Bank ( email )

Fraumuensterstr. 8
Zurich, 8022
Switzerland

Bank for International Settlements (BIS)

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Thomas Chaney

SciencesPo - Sciences Po - Department of Economics ( email )

28, rue des Saints-Pères
Paris, Paris 75007
France

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Philip U. Sauré

Johannes Gutenberg University Mainz - Gutenberg School of Management and Economics ( email )

Germany

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

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