Saturday, 31 March 2012: 4:45 PM
Data on international relative prices show that changes in producer prices are not fully
passed on to export prices. Standard trade models, however, have so far failed to explain this
observation. In this paper, I introduce a model of international trade with heterogeneous firms
and incomplete information. I show that when firms have incomplete information on their
rivals' costs and face international trade frictions, they optimally choose to price to market.
The model successfully reproduces main features of international relative price fluctuations
once calibrated to fit the US trade data. Moreover, it provides two testable predictions on
pricing to market behavior at the firm level: The model implies that there is less pricing-to-
market and higher pass-through in differentiated good prices, and that high productivity firms
pass through their costs into their prices more so than lower productivity firms.
passed on to export prices. Standard trade models, however, have so far failed to explain this
observation. In this paper, I introduce a model of international trade with heterogeneous firms
and incomplete information. I show that when firms have incomplete information on their
rivals' costs and face international trade frictions, they optimally choose to price to market.
The model successfully reproduces main features of international relative price fluctuations
once calibrated to fit the US trade data. Moreover, it provides two testable predictions on
pricing to market behavior at the firm level: The model implies that there is less pricing-to-
market and higher pass-through in differentiated good prices, and that high productivity firms
pass through their costs into their prices more so than lower productivity firms.