Impact of Exchange Rate Fluctuations on Profit Margins: The UK Car Market, 1971-2002

Journal of Applied Economics, Vol. 10, No. 1, pp. 213-235, May 2007

Posted: 16 Jun 2007

See all articles by Francisco Requena

Francisco Requena

University of Valencia - Department of Applied Economics II

James T. Walker

Henley Business School, University of Reading

Abstract

We investigate the impact on profit margins of exchange rate fluctuations in order to examine optimal pricing policy by source countries in the UK car market. We first estimate a nested logit demand model of new cars to calculate model-specific profit margins. Next we use these estimates to analyse the pricing-to-market (PTM) behaviour of car importers and local producers. The results show that: (1) profit margins fell over the period 1971-2002 as the UK car market moved from being a concentrated market to a looser oligopoly structure; (2) there is a positive association between exchange rate changes and mark-up adjustments of imported cars. Following a 10% pound depreciation, exporters' profit margins declined by up to 4% and local producers' profit margins increased by up to 2%; (3) PTM behaviour is asymmetric between appreciations and depreciations in bilateral exchange rates.

Keywords: exchange rates, markup adjustment, pricing to market, cars

JEL Classification: L2, L6

Suggested Citation

Requena Silvente, Francisco and Walker, James T., Impact of Exchange Rate Fluctuations on Profit Margins: The UK Car Market, 1971-2002. Journal of Applied Economics, Vol. 10, No. 1, pp. 213-235, May 2007, Available at SSRN: https://ssrn.com/abstract=993137

Francisco Requena Silvente (Contact Author)

University of Valencia - Department of Applied Economics II ( email )

Edifici Departamental Oriental
Avda. dels Tarongers, S/N
46022 Valencia
Spain
+34 963 828 353 (Phone)
+34 96 3828 354 (Fax)

HOME PAGE: http://www.uv.es/frequena/

James T. Walker

Henley Business School, University of Reading ( email )

PO Box 218
Reading, Berkshire RG6 6AH
United Kingdom
+44 (0) 118 378 7374 (Phone)

HOME PAGE: http://www.henley.ac.uk/people/person/dr-james-walker/

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