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Pricing-to-Market: Price Discrimination or Product Differentiation?

25 Pages Posted: 24 Nov 2004  

Nathalie Lavoie

University of Massachusetts at Amherst - College of Natural Resources & the Environment - Department of Resource Economics

Qihong Liu

University of Oklahoma - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: August 2006

Abstract

We employ a vertical differentiation model to examine the potential bias in pricing-to-market (PTM) results when using unit values aggregating differentiated products. Our results show that: i) false evidence of PTM ("pseudo PTM") is always found when using unit values, whether the law of one price holds or not; and ii) the extent to which results are biased due to pseudo PTM increases with the level of product differentiation. Correspondingly, our simulation results suggest that: i) it is possible to get a statistically significant estimate of the exchange rate coefficient, even when there is no real PTM; ii) the probability of a false PTM finding increases with product differentiation. Pseudo PTM is the result of a change in the mix of qualities imported when the exchange rate changes.

Keywords: Pricing-to-market, Vertical differentiation, Unit values, Price discrimination, Quality upgrading

JEL Classification: D42, F10, L12

Suggested Citation

Lavoie, Nathalie and Liu, Qihong, Pricing-to-Market: Price Discrimination or Product Differentiation? (August 2006). Available at SSRN: https://ssrn.com/abstract=622986 or http://dx.doi.org/10.2139/ssrn.622986

Nathalie Lavoie (Contact Author)

University of Massachusetts at Amherst - College of Natural Resources & the Environment - Department of Resource Economics ( email )

Stockbridge Hall
80 Campus Center Way
Amherst, MA 01003-9246
United States
413-545-5713 (Phone)
413-545-5853 (Fax)

Qihong Liu

University of Oklahoma - Department of Economics ( email )

Norman, OK 73019-2103
United States
405-325-5846 (Phone)

HOME PAGE: http://qliu.oucreate.com

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