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International shocks and domestic prices:How large are strategic complementariti?

Author

Listed:
  • Mary Amiti

    (Federal Reserve Bank of New York, 33 Liberty Street, New York, NY 10045)

  • Oleg Itskhoki

    (Princeton University, Department of Economics, Princeton, NJ 08544)

  • Jozef Konings

    (Katholieke Universiteit Leuven, Department of Economics, Naamsestraat 69, 3000 Leuven, Belgium, National Bank of Belgium)

Abstract
How strong are strategic complementarities in price setting across firms? In this paper, we provide a direct empirical estimate of firm price responses to changes in prices of their competitors. We develop a general framework and an empirical identification strategy to estimate the elasticities of a firm’s price response to both its own cost shocks and to the price changes of its competitors. Our approach takes advantage of a new micro-level dataset for the Belgian manufacturing sector, which contains detailed information on firm domestic prices, marginal costs, and competitor prices. The rare features of these data enable us to construct instrumental variables to address the simultaneity of price setting by competing firms. We find strong evidence of strategic complementarities, with a typical firm adjusting its price with an elasticity of 35% in response to the price changes of its competitors and with an elasticity of 65% in response to its own cost shocks. Furthermore, we find substantial heterogeneity in these elasticities across firms, with small firms showing no strategic complementarities and a complete cost pass-through, while large firms responding to their cost shocks and competitor price changes with roughly equal elasticities of around 50%. We show, using a tightly calibrated quantitative model, that these findings have important implications for shaping the response of domestic prices to international shocks.

Suggested Citation

  • Mary Amiti & Oleg Itskhoki & Jozef Konings, 2016. "International shocks and domestic prices:How large are strategic complementariti?," Working Paper Research 295, National Bank of Belgium.
  • Handle: RePEc:nbb:reswpp:201603-295
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    File URL: https://www.nbb.be/doc/ts/publications/wp/wp295en.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Pass-through; markups; strategic complementarities; firm heterogeneity;
    All these keywords.

    JEL classification:

    • F1 - International Economics - - Trade
    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

    NEP fields

    This paper has been announced in the following NEP Reports:

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