ADJUSTMENT COSTS AND PRICING-TO-MARKET - THEORY AND EVIDENCE

This paper develops an adjustment cost model of pricing-to-market. The model consists of a monopolist who supplies an identical, nondurable good to two foreign markets. It is shown that the degree of pricing-to-market increases with the relative importance of the transitory component in exchange rates. Customs data from 1978 through 1987 on U.S. and Canadian imports of seven German commodities are used to estimate the model's parameters and test its over-identifying restrictions.