This paper explicitly takes into account the dynamic oligopolistic rivalry among source producers to evaluate the degree of exchange rate pass-through. Using recent time-series techniques for the case of imported automobiles in Switzerland, the results show that prices are strategic complements and that the degree of pass-through is lower in the long run than in the short run. We attribute this to the fact that, although some rivals match long-term price changes, others do not, inducing the producer who faces a change in exchange rate to absorb a greater proportion of the variation.
import market because there is no dominant producer and it is consistent with an oligopoly setting with four source-countries covering a large fraction of the market. Another important feature of this market is the absence of significant distortionary trade barriers against Japanese automobiles.
The main message of this paper is that price interdependencematters and that exchange rate variations can have significant feedback effects on rivals’ prices leading to smaller pass-through in the long-run than in the short-run. Using recently developed econometric