Publication

This article is about the price-discriminating practices of exporters.  More specifically, we are analyzing how firms endowed with market power change their prices in response to exchange rate changes.  When the exporter's currency depreciates, the purchasing power of importers increases and an exporter with market power could decide to increase its price denominated in its own currency.  The increase is moderate in the sense that the price expressed in foreign currency stills falls after the depreciation.  This outcome is what is called an incomplete exchange rate pass-through.  Changing prices can be costly.  A classic example is that of a firm that must incur printing and distribution costs to inform its customers about its new prices.  Menu costs can take different forms.  In dealing with foreign customers, translation and legal services may be needed.  The implication is that small exchange rate changes are not likely to trigger price adjustments, unlike large ones.  The challenge in this paper was to implement a procedure capable of identifying a band of exchange rate changes within which no systematic changes in price would take place.  Conversely, large decreases or increases in exchange rates below or above the band would trigger systematic price adjustments. 

We analyzed the behaviour of prices for pork originating from Quebec and Ontario and sold in the United States and Japan.  We found solid evidence that Canadian exporters have market power in the U.S., but weaker evidence for Japan.  It was hypothesized that menu costs would be higher in the Japanese market than in the US because the US and Canadian meat markets are well integrated due to a common border, a common language and a bilateral trade agreement. The empirical model could not reject that hypothesis for exports originating from Quebec. However, menu costs for Ontario pork exports seem to be greater for the US market than for the Japanese market. We argue that this paradoxical result could arise because of differences in export/product composition and product-specific menu costs.