Accounting for Incomplete Pass-Through

Abstract

Recent theoretical work has suggested a number of potentially important factors in causing\nincomplete pass-through of exchange rates to prices, including markup adjustment, local costs\nand barriers to price adjustment. We empirically analyze the determinants of incomplete passthrough\nin the coee industry. The observed pass-through in this industry replicates key features\nof pass-through documented in aggregate data: prices respond sluggishly and incompletely to\nchanges in costs. We use microdata on sales and prices to uncover the role of markup adjustment,\nlocal costs, and barriers to price adjustment in determining incomplete pass-through using a\nstructural oligopoly model that nests all three potential factors. The implied pricing model\nexplains the main dynamic features of short and long-run pass-through. Local costs reduce\nlong-run pass-through by a factor of 59% relative to a CES benchmark. Markup adjustment\nreduces pass-through by an additional factor of 33%, where the extent of markup adjustment\ndepends on the estimated \\super-elasticity" of demand. The estimated menu costs are small\n(0:23% of revenue) and have a negligible eect on long-run pass-through, but are quantitatively\nsuccessful in explaining the delayed response of prices to costs. We nd that delayed passthrough\nin the coee industry occurs almost entirely at the wholesale rather than the retail\nlevel.