Pricing-to-Market: Price Discrimination or Product Differentiation?
25 Pages Posted: 24 Nov 2004
Date Written: August 2006
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
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