Pricing to market behavior of Korean exporting firms.

Most Korean exports are invoiced in U.S. dollars. The Korean currency (won) export price to a certain destination is governed by the won-U.S. dollar exchange rate and the destination-U.S. dollar exchange rate. The effects of these two bilateral exchange rate changes may not be identical empirically. It turns out that the former effects are dominant, and Knetter's model is not valid. Korean firms seem to stabilize their export prices in U.S. dollars, not in destination currencies, even when the destination is not the United States. Four theoretical explanations are provided to explain these empirical results. First, although in other respects, they have common effects, the change in the won-U.S. dollar exchange rate has the additional effect of influencing production costs, because most imported inputs are invoiced in U.S. dollars. Second, menu costs of invoice price changes drive firms not to change their invoice prices when the destination currency-U.S. dollar exchange rate change is small. Third, costs of price discrimination make firms charge common profit maximizing invoice prices, and the former effects equal the sum of the effects of the change in each destination currency-U.S. dollar exchange rate. Fourth, if firms expect that the destination currency-U.S. dollar exchange rate change is temporary but the won-U.S. dollar exchange rate is permanent, they would avoid changing their invoice prices in order to keep market share. Why most Korean exports are invoiced in U.S. dollars are also explained by four arguments. First, the won may not have acquired acceptability or liquidity yet. Second there is an inertia effect, because Korea did not accept the obligations of Article VIII of the IMF Agreements before 1988 and the won shadowed the U.S. dollar before the introduction of a market average exchange rate system in 1990. Third, Korean exporters may choose the most stable currency to the won to minimize profit risks. Due to Krugman's target zone theory, the won-U.S. dollar exchange rate is relatively stable. Fourth, Korea could be considered as one firm country thanks to large conglomerates and general trading companies. Choosing one currency as an invoice currency helps them save currency exchange transaction costs.PhDEconomicsSocial SciencesUniversity of Michigan, Horace H. Rackham School of Graduate Studieshttp://deepblue.lib.umich.edu/bitstream/2027.42/131141/2/9825387.pd