Retailers and Consumers: The Pass‐through of Import Price Changes

• Author: Dominik Boddin,Eike Berner,Laura Birg
• Published date: 01 July 2017
• Date: 01 July 2017
• DOI: http://doi.org/10.1111/twec.12432

Retailers and Consumers: The

Pass-through of Import Price Changes

Eike Berner

1

, Laura Birg

2

and Dominik Boddin

3

1

Deutsche Bundesbank, Frankfurt am Main, Germany,

2

Department of Economics, University of

G€

ottingen, G€

ottingen, Germany and

3

Department of Economics, Kiel University, Kiel, Germany

1. INTRODUCTION

IN this paper, we estimate pass-through rates of import price changes to retail prices acro ss

retailers and consumers for apparel purchases in Germany for the period of 2000–07. On

1 January 2005, the Multi Fibre Arrangement (MFA), which had imposed quotas for imports

of clothing and textiles from developing countries, expired. The Agreement on Textiles and

Clothing (ATC) guided a successive elimination of the import quotas for textile and clothing

products over a 10-year transitional period (European Commission, 2000). Francois et al.

(2007) find that the ATC phase-out caused a 30.6 per cent drop in producer prices in Euro-

pean countries from 1996 to 2004. In this period, German retail prices fell by about 13 per

cent. Francois and Woerz (2009) estimate that the trade cost equivalent of the quotas

accounted for roughly 20 per cent before the final phase-out in January 2005. Even though

new quotas were implemented in 2005, we can observe a steady increase in apparel imports,

especially from China, and a substantial decrease in import prices for Germany in the period

of our observation. This raises the question, whether and to what extent these price changes

are passed through by retailers to consumers.

There is a substantial literature on pass-through rates, mostly on the pass-through of exchange

rate changes (see e.g. Burstein and Gopinath, 2014 for an excellent survey).

1

Typically, these

studies document incomplete pass-through rates; that is, goods prices change by less than real

exchange rates. Important factors in explaining incomplete pass-through rates include (but are

not limited to) search frictions (Alessandria, 2004), frequency of price adjustment (Gopinath and

Itskhoki, 2010), invoice currency choice (Fabling and Sanderson, 2015), market power and the

degree of competition (Goldberg and Knetter, 1997; Amiti et al., 2014), product quality (Auer

and Chaney, 2009; Chen and Juvenal, 2016), sourcing of foreign inputs (Goldberg and Campa,

2010; Hellerstein and Villas-Boas, 2010; Bernini and Tomasi, 2015) as well as market structure

and the heterogeneity of firms (Berman et al., 2012; Raff and Schmitt, 2012; Auer and Schoenle,

The paper represents the authors’ personal opinions and does not necessarily reflect the view of the

Deutsche Bundesbank.

We wish to thank Christoph Tillmanns and Joachim Kuhl at the GfK for providing help and access to

the data. We are grateful to Horst Raff and Holger G€

org for their support and detailed comments. We

thank Markus Kelle, Jan Vobwinkel, three anonymous reviewers as well as seminar participants at

Copenhagen, Kiel, and G€

ottingen for helpful comments.

1

In this paper, we do not explicitly look at exchange rate pass-through. Exchange rate variation, how-

ever, is one of the sources of import price variation we see in the data. We cannot distinguish between

different reasons of price variation. Accordingly, the obtained results on pass-through rates of import

price changes cannot be compared directly to pass-through rates of exchange rate changes. However, we

show that distribution cost and the degree of competition that explain incomplete exchange rate pass-

through also explain incomplete import price pass-through.

©2016 John Wiley & Sons Ltd

1314

The World Economy (2017)

doi: 10.1111/twec.12432

The World Economy

2016). Several studies emphasise the importance of the retail and distribution sector for varia-

tions in pass-through rates, for example Burstein et al. (2003), Corsetti and Dedola (2005) and

Francois et al. (2010). Among the papers most closely related to ours are Nakamura and Zerom

(2010) and Hellerstein (2008) who emphasise the importance of markup adjustment and local

cost. Nakamura and Zerom (2010) estimate an incomplete pass-through to retail prices in the US

coffee industry of 27 per cent. They show that local costs account for 59 per cent of incomplete

pass-through. Hellerstein (2008), who investigates US beer prices, finds that retailer markup

adjustments and local-cost components explain incomplete pass-through.

The two main contributions of this paper are as follows: first, we show that the pass-through

of import price changes to retail prices is incomplete and differs across firms. We estimate that

high-price retailers do not pass through changes in the import price. By contrast, low-price

retailers show a pass-through rate of 53 per cent within three months. Our paper builds upon the

importance of local cost and the degree of competition as explanations for incomplete pass-

through (see, e.g. Hellerstein, 2008 and Nakamura and Zerom, 2010). We explain the degree of

pass-through and the asymmetry in pass-through rates in a simple model with vertical product

differentiation, where one firm bundles an ex ante homogeneous good with a service. Offering

the service is costly for firms and induces different price elasticities of demand, different mark-

ups and thus different exposure of firms to competition. Second, we show that pass-through rates

also differ across income groups. The estimated pass-through rate of 58 per cent for low-income

households is significantly larger than that for high-income households. Low-income households

prefer retailers with lower price levels that have higher pass-through rates, whereas high-income

households buy from retailers with higher price levels that show lower pass-through rates. Con-

sequently, we observe asymmetric real income effects of import price changes across consumers

as a result of different consumption patterns.

2

The rest of the paper is organised as follows: Section 2 introduces the data and provides

stylised facts. In Section 3, we present our estimation strategy and the empirical results. Sec-

tion 4 introduces our theoretical model. Section 5 concludes.

2. DATA AND STYLISED FACTS

In this section, we describe the data and provide stylised facts that motivate our analysis.

We use the ‘Universalpanel’ –monthly household consumption data provided by the

‘Gesellschaft f€

ur Konsumforschung’ (GfK), a German market research institute. The data

cover the period from January 2000 to December 2007 and have a total of 2,036,356 obser-

vations. This includes 11,934 households and 188 retailers. Participating households have to

assign their purchases to 102 different categories (ranging from apparel products as well as

electronic articles to housewares) and specify the price and the retailer for each purchased

item. One observation consists of one reported product purchase by one household (k)ata

retailer (r) at time (t). Additionally, household characteristics such as the net income and

size as well as the buyer’s age, profession and education are reported. In this paper, we

focus on the apparel categories only, since these categories exhibit high changes in import

prices and a high import penetration. Our final sample contains 22 apparel categories. These

include all apparel categories as classified by the GfK except two categories of ‘overcoats’,

2

Similarly, Han et al. (2016) show that the WTO accession of China had a pro-poor distributional

effect.

©2016 John Wiley & Sons Ltd

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