Exchange Rate Changes and Pricing Behavior of US Exporters

This paper studies export pricing behavior following exchange rate changes in US manufacturing industries. Through a monopolistic model, the paper predicts that export prices should change, but less than proportionally, in response to exchange rate changes if either or both demand elasticity and marginal cost are variable. Cross-industry variation of such price changes can be explained by the difference in demand elasticities between the domestic and the export markets, the elasticity of marginal cost with respect to output. and the export share. These predictions are supported by the empirical findings of the paper.     

Welfare‐reducing Domestic Cost Reduction*

We show that cost reduction by a domestic firm may reduce domestic welfare if it changes a foreign firm’s production strategy from foreign direct investment to export. Domestic cost reduction can be welfare reducing when the domestic market is sufficiently small and domestic firm’s marginal cost of production is higher than the foreign firm’s marginal cost of production under foreign direct investment, which is a usual feature of trade between developed and developing countries. So, developing countries with small domestic markets need competent competition policies when encouraging domestic innovation and also trying to attract foreign direct investment.     

Market entry,privatization and bank performance in transition1

This paper examines how market entry and privatization have affected the margins and marginal costs of banks in the post‐communist transition. We estimate bank revenue and cost functions, allowing the estimated parameters to change over time. In the first sub‐period (1995–98), we find that privatized banks earned higher margins than other banks, while foreign start‐ups had lower marginal costs. In the third sub‐period (2002–2004), foreign banks remained low marginal cost service providers, while privatized domestic banks had the widest margins. Subtracting marginal costs from margins to calculate mark‐ups, an indication of demand for services, shows that initially privatized banks had the largest mark‐ups. However, by the third sub‐period, differences among private banks diminished. In comparison to private banks, state banks persistently under‐performed in controlling costs and attracting demand. Our evidence therefore indicates that foreign bank entry promoted lower costs and that privatization and market entry encouraged more demand for services.     

Optimal Trade Policy under Homogeneous Bertrand Competition*

In a seminal paper, Eaton and Grossman (1986) conclude that an export tax is optimal if firms produce heterogeneous products and engage in Bertrand price competition. In particular, they made a comment that could be interpreted to mean that even in the case of a homogeneous product, the optimal policy is still an export tax. This paper has re‐examined the case and found that the optimal export policy can be an export subsidy, free trade, or an export tax, depending on the marginal cost differential between the domestic and the foreign firms. Moreover, if government intervention entails a cost, free trade becomes the only optimal policy.     

Exporting to bypass weak institutions

Institutions have been shown to be important for trade and growth. In particular, weak institutions may reduce the returns to product quality, harming domestic welfare and making it attractive to export to countries with strong institutions where quality is better rewarded. We model this alternative story as to why the “good apples are shipped out” and explore whether exporting ameliorates the problems created by weak institutions. We find that, instead, because home prices do not reflect the marginal value of quality, access to developed markets can be welfare reducing. Specifically, there are always export prices such that total welfare (and not just consumer welfare) is harmed by exporting. Furthermore, if the domestic price equilibrates to the export price, then the marginal unit exported reduces total welfare. Exporting can even reduce producer surplus, leading to a contraction of the export industry; although, welfare can decrease even if production of the exported good increases. Thus, our results reinforce the importance of strengthening institutions to help the development of economies.     

TESTING MODELS OF DIFFERENTIATED PRODUCTS MARKETS: CONSOLIDATION IN THE CABLE TV INDUSTRY

Research on differentiated products markets often uses structural demand/supply models to identify firms' marginal costs as product‐level cost data are unavailable. Using unique demand and cost data from cable TV, I evaluate a differentiated products model's ability to identify marginal costs. I find firms systematically price below profit‐maximizing levels, leading to biases in the model's marginal cost estimates. I study the implications for merger simulations and find that these biases compromise estimates of merger‐related cost efficiencies, yet do not prevent these models from generating useful predictions of the price and nonprice effects of mergers.     

Data frequency and exchange rate pass-through: Evidence from India's exports

This paper studies the pricing behavior of Indian exporters using both annual and monthly data in order to uncover the role of data frequency in determining variation in the degree of short and long-run exchange rate pass-through (ERPT). Export price data during the post-1991 economic reforms period is disaggregated at the two-digit industry level and using a novel methodology in the ERPT literature (cointegration for heterogeneous panels) cross-industry differences in adjustment are identified. We observe that there is clear evidence of incomplete ERPT to prices in India's export markets, after having controlled for the level of exchange rate volatility and domestic inflation as an indicator of variations in marginal cost. The empirical results indicate that monthly data reflect more incomplete ERPT to destination market prices, relative to annual data, in which all the short run rigidities are more likely to have been adjusted. Thus studies that use higher frequency data are more likely to find incomplete ERPT in the short-run, even in the context of an emerging market economy. In the long-run, incomplete ERPT subsists in a few industries for both data frequencies.     

A 'pricing-to-market' model with unobserved variables: explaining New Zealand's import prices

A model of ‘pricing-to-market’ (PTM) behaviour in import prices is developed for a small open economy to allow for two measurement problems: (i) that neither the marginal production cost of imported goods nor their corresponding (foreign-currency) export price are observable by the econometrician; (ii) that PTM behaviour, if it exists, alters the relationship between foreign countries' export price indices for total exports and the true, unobservable price index. The analysis shows that variations in the measured markup on import prices depends on the degree to which domestic demand is synchronized with world demand, whether bilateral exchange rate movements are due to domestic or foreign factors, and on the degree to which PTM behaviour differs from such behaviour in other countries. Equations estimated for the price of New Zealand (NZ) imports from the US strongly supports the model, and finds that the degree of PTM by US exporters in response to price and exchange rate movements is substantially greater in NZ than the average for other countries. However, the degree of PTM in NZ in response to excess demand is similar to that of other countries.     

Distortions to agricultural incentives: Evidence from Nigerian value chains

Understanding how policies affect price transmission and incentives for producers and consumers along the complete value chain is a relevant research question due to the more globalized structure of agricultural value chains. In particular, Nigerian agricultural value chains have been targeted by a number of policy decisions. We analyze the import‐oriented palm oil value chain and the export‐oriented cacao value chain, estimating the price distortions from policies and their implications for production incentives at the regional level. For palm oil, due to protective trade policies and domestic initiatives, the nominal rate of protection (NRP) at the farmgate for palm oil producers shows that producers have been protected. NRPs at the border for cacao beans and cocoa products are negative, which may be due to a quality gap, the export market structure, and the concentration of buyers in global markets. Negative NRPs at the farmgate are seen for all regions, showing disincentives in the cacao beans export market reverberate through the domestic market despite domestic support policies. In both value chains, NRPs at farmgate vary across regions partially due to regional policy frameworks and partially due to local conditions impacting price transmission.     

Markups of Exporters and Importers: Evidence from Hungary

In this paper, we study the relationship between different proxies of firm‐level markups and trade status, using balance sheet information linked to detailed trade data from Hungary between 1995 and 2003. We find that importing is strongly positively correlated with markup measures, both across and within firms. We argue that this correlation can reflect three channels: self‐selection, higher physical productivity resulting from access to a larger variety of inputs, and quality upgrading based on high‐quality imported intermediate inputs. We present evidence for the relevance of the third channel by showing that importers’ markup premium is higher when inputs arrive from developed countries, and that importing is correlated with higher‐quality (price‐adjusted revenue) exports. We find no robust evidence for exporter premium when controlling for importing. We argue that the non‐existent exporter premium might result from the stronger competition in export markets relative to domestic markets.     

PLATFORM PRICING IN MIXED TWO‐SIDED MARKETS

When a consumer can appear on both sides of a two‐sided market, such as a user who both buys and sells on eBay, the platform may want to bundle the services it provides to two sides. I develop a general model for such “mixed” two‐sided markets and show that a monopolist platform's incentive to bundle and its optimal pricing strategy are determined by simple formulas using familiar price elasticities of demand, which embody the bundling effect, and price‐cost margins adjusted for network externalities, which incorporate “two‐sidedness.” The optimal pricing rule in such markets generalizes the familiar Lerner formula.     

Foreign competition and social efficiency of entry

We consider social efficiency of firm-entry in the presence of foreign competition. If the labour markets are competitive, entry is insufficient for the domestic country if the transportation cost is low and the marginal costs of the domestic firms are sufficiently higher than the marginal cost of the foreign firm. In the presence of a domestic labour union, entry is always socially insufficient for the domestic country. Hence, the anti-competitive entry-regulation policy may not be justified in an industry facing foreign competition, and it may depend on the transportation cost, the marginal cost difference between the firms and the domestic labour market structure.     

Does the distinction between gross and value‐added exports matter? An empirical investigation of export elasticities

This study uses bilateral U.S. export data from the OECD’s Trade in Value‐Added database to estimate and compare elasticities for three distinct export measures: conventional measures of gross exports, domestic value added in gross exports, and value‐added exports. It finds little evidence of significant differences in the income elasticities across the three export measures or in the price elasticities of gross exports and domestic value added in gross exports. However it finds a significantly higher price elasticity for value‐added exports, suggesting that conventional price elasticity estimates may underestimate the impact of a real dollar depreciation on U.S. exports of value added.     

Markups and exporting behavior of foreign affiliates

This study investigates the effect of exporting on markups for firms in China with a focus on foreign affiliates. Firm markups are first recovered after correcting for both output and input price biases. The analysis reveals that exporters which are affiliates of foreign firms charge, on average, lower markups in their export pricing. The markups are decomposed into price and marginal cost components to show that although exporting increases both price and marginal cost, the price increases are small relative to the increases in marginal cost. Heterogeneous effects of exporting on markups across firms and location are also examined.     

SECTORAL PRODUCTIVITY GROWTH AND PRICE-MARGINAL COST MARGINS IN THE INTERMEDIATE GOODS MARKET

Models of aggregate productivity growth linked to sectoral models of production typically assume that all intermediate goods markets are perfectly competitive. An econometric analysis reveals that many intermediate goods markets exhibit transactions at prices quite different than marginal cost. Measures of productivity growth that ignore these market imperfections are biased. A measure of the actual magnitude of the bias that emerges under the assumption of equating price to marginal cost is constructed.     

Extreme dependence in price transmission analysis

We propose a generalized procedure that combines conventional price transmission analysis with copula-based dynamic tail dependence, to examine price relationships under extreme conditions. This approach is used to examine Ukrainian wheat markets where export restrictions combined with price surges, 2006–2008 and 2010–2012, have contributed to a turbulent market. The results indicate that domestic prices were effectively insulated from world price shocks, but that a ‘rocket and feathers’ price relation held between domestic flour and wheat prices. These asymmetric price co-movements changed with the degree of restrictiveness of the export prohibitions.     

Social welfare loss due to second-best pricing: an application to the Portuguese telecommunications

The telecommunications industry is usually characterized by low marginal costs and significant fixed costs which are the conditions for the inefficiency of marginal cost pricing. In such cases theory postulates that optimal pricing is obtained by maximizing welfare subject to a restriction of viability of the firm: the second-best pricing scheme. The possible welfare losses due to second-best pricing varies according to the values of marginal costs, prices and demand elasticities. This paper analyses to what extent the second-best pricing has been achieved in the Portuguese telecommunications firm CTT, over the period 1950#150;1984 as well as the magnitude of the price-cost margins and welfare losses created. We obtained empirical evidence of the presence of economies of scale, a welfare loss estimate of 1% of the telecommunications receipts and a result that price was 40% greater than marginal cost. We concluded that price regulation and public ownership of the firm did not seriously affect social welfare over the sample period (it should be noted that it is the non-digital and fixedwire infrastructure period). Therefore, it is important to study the impact of new digital and non-wire technologies and new services provided in the old regulatory scenery.     

A Partial Equilibrium Analysis of Trade with Decreasing Transport Costs

Decreasing transport costs are incorporated in the standard partial equilibrium analysis of trade by allowing the divergence—introduced by transport costs—between export and import price to decrease with the volume of trade. When the excess demand (supply) curve is steeper than the long run average cost curve for imports (exports), we observe that an import (export) tariff raises (lowers) the domestic price by an amount exceeding the tariff. Further, when the excess demand (Supply) curve is less steep than the long run average cost curve for imports (exports), the possibility exists that an import (export) tariff may lower (raise) the domestic price. These results lead to the important conclusion that tariffs cannot be used as measures of nominal protection across industries. [F10]     

Do cost efficiency gap and foreign competitors matter concerning optimal privatization policy at the free entry market?

In this paper, we demonstrate that in contrast to the case with exogenous number of foreign private firms, partial privatization is always the best policy for the public firm in long-run equilibrium, which casts doubt on the robust result in Matsumura and Kanda (J Econ 84(1):27–48, 2005) who argued that welfare-maximizing behavior by the public firm is always optimal in mixed markets. Critical cost gap determines that long-run degree of privatization is larger than the short-run one. In particular, regarding the scenario wherein one public firm competes with domestic private firms and foreign private firms, equilibrium price is lower than marginal cost of public firm instead of being equivalent to marginal cost of the public firm, and that public firm’s outputs, profit, and social welfare is the smallest in the concerned mixed oligopoly models.     

Pricing in International Markets: a "Small-country" Benchmark

The paper studies export pricing to market (PTM) in a “small‐country” context using a panel of disaggregated exports from Hong Kong since 1992. Conventional wisdom is that PTM is commonplace—except for US exports. This study provides a benchmark by which to interpret the puzzling behavior of US export prices. Empirically, Hong Kong's export price behavior is comparable to that of the US. This similarity reinforces the idea that PTM behavior is also a function of home market conditions and the ability to price discriminate across markets. There is little evidence of differences in PTM across Hong Kong's export destinations.