FirmsaEUR(tm) Heterogeneity and Incomplete Pass Through
A large body of empirical work documents that prices of traded goods change by a smaller proportion than real exchange rates between the trading countries (incomplete pass through) The wedge between exchange rates and relative prices also varies a cross countries (pricing to market) I present a model of trade and international price setting with heterogeneous firms, where firmsaEUR(tm) strategic behavior implies that: 1) firm level pass through is incomplete and a U shaped function of firm market share; 2) exchange rate fluctuations affect both the prices of traded goods and the prices of goods sold domestically; and 3) firm level pass through varies across destination countries. Estimates from a panel data set of cars prices support the predictions of the model.