This paper characterizes the price adjustment costs that are consistent with observed price dynamics in the European car market. Using the methodology developed by Bajari, Benkard, and Levin (2007), I estimate a dynamic model of international multiproduct firms that set prices in different currencies while facing price adjustment costs. There are three main results. First, the incomplete degree of exchange rate pass-through can be explained by a sizable destination-currency cost component. Second, large price adjustment costs are not needed to rationalize the large degree of price inertia in a highly autocorrelated economic environment. In fact, small adjustment costs can rationalize the persistent prices observed. Third, the paper identi.es an unexplored temporal dimension of «pricing-to-market» behavior, that is the practice of setting prices differently across segmented markets. Estimates of the price adjustment cost suggest that a uniform cost structure is not consistent with the pricing behavior observed.
JEL Classification: F10, F31, L11, L16.
Keywords: Exchange rate pass-through, price adjustment costs., structural estimation