Structural estimation of price adjustment costs in the European car market

Abstract

I estimate a dynamic model of international multiproduct manufacturers who set prices in different currencies facing price adjustment costs. The main contribution of this paper is to characterize price adjustment costs that are consistent with the observed price dynamics in the autocorrelated and heterogeneous European car market. Using the methodology developed by Bajari, Benkard, and Levin (2007), I found three main results for the estimated cost structure . First, I rationalize the incomplete degree of exchange rate pass-through with destination-currency costs of a third of total costs. Second, there is no need for large price adjustment costs to rationalize the large degree of price inertia. Intuitively, in a highly autocorrelated economic environment a small adjustment costs can rationalize the persistent prices observed. Third, my estimates of price adjustment cost seem to be producer-destination specific since a uniform cost structure is not consistent with the pricing behavior observed whilst accounting for different sources of heterogeneity. Hence I identify an unexplored temporal dimension of “pricing-to-market” behavior, which is the practice of setting prices differently across segmented markets