Market Structure, the Exchange Rate, and Pricing Behavior by Firms: Some Evidence from Computable General Equilibrium Trade Models

This paper returns to the static Cournot model, criticized by Krugman, and demonstrates that an exchange rate change will have general equilibrium effects that, in the presence of tariffs or transportation costs, are likely to give rise to pricing to market. In particular, a dollar appreciation will cause changes in the prices of primary factors and intermediate inputs which lower marginal cost for U.S. producers relative to foreign producers. Remarkably, the fall in U.S. production costs, in turn, lowers the foreign market price relative to the U.S. market price when tariffs or transportation costs are present. Thus, exchange rate pass-through appears to be incomplete because the change in relative production costs has also altered the real equilibrium price structure for the two markets. This outcome is entirely consistent with profit-maximization in a one-period model.Research Seminar in International Economics, Department of Economics, University of Michiganhttp://deepblue.lib.umich.edu/bitstream/2027.42/100647/1/ECON122.pd