Type
Article
Title
Quality pricing-to-market
In
Journal of International Economics
Author(s)
AUER Raphaël - Swiss National Bank (Author)
CHANEY Thomas - Département d'économie (Author)
SAURÉ Philip - University of Mainz (Author)
Editor
NL : Elsevier
Number
110
Pages
87 - 102 p.
ISSN
00221996
DOI
10.1016/j.jinteco.2017.11.003
Keywords
Quality, Product differentiation, Pricing-to-market, Exchange rate pass-through
Abstract
EN
This paper analyzes firm's pricing-to-market decisions in vertically differentiated industries. We first present a model featuring firms that sell goods of heterogeneous quality levels to consumers who are heterogeneous in their income and thus their marginal willingness to pay for quality increments. We derive closed-form solutions for the unique pricing game under costly international trade. The comparative statics highlight how firms' pricing-to-market decisions are shaped by the interaction of consumer income and good quality. We derive two testable predictions. First, the relative price of high qualities compared to low qualities increases with the income of the destination market. Second, the rate of cost pass-through into consumer prices falls with quality if destination market income is sufficiently high. We present evidence in support of these two predictions based on a dataset of prices, sales, and product attributes in the European car industry.

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