The Effect of Vertical Structure on Exchange Rate Pass-through

We introduce an explicit incorporation of local distributors in an analysis of pricing behavior of exporting firms in the pricing-to-market literature. We examine pricing behaviors of exporting firms under four different cases of vertical structure; in the case of an independent local distributor and in the cases of local distributors vertically restricted in three forms. From our theoretical model we find that the form of vertical structure for exporting firms has a significant effects on exchange rate pass-through. Since the measure of pass-through has not been distinguished between wholesale price and consumer price in previous researches, we conclude that the reported values of pass-through from previous researches only capture the partial pricing behavior of traded goods. We suggest that further empirical investigation in pass-through associated with consumer price is necessary for complete understanding of the pricing behavior of traded goods.