Exchange rates and market power: evidence from the petrochemical industry

This paper takes a microeconometric approach to the study of exchange rate pass-through in imperfectly competitive markets. We provide evidence for the hypothesis that incomplete exchange rate pass-through can be attributed to non-competitive conduct by foreign firms. A unique feature of our approach is the use of highly disaggregated industry data which is compatible with the behavioral assumptions of a homogeneous-product oligopoly model. We employ a panel data set consisting of location- and product-specific price and cost data for 29 traded petrochemicals for the US, Germany and Japan during 1982 to 1993. Our empirical estimates indicate that German and Japanese firms exercised (statistically) 'significant' market power in the US petrochemical market during our sample period. (C) 2000 Elsevier Science B.V. All rights reserved.