- Retailer markup and exchange rate pass-through: Evidence from the Mexican CPI micro data
I develop a structural model with nested CES preferences to obtain optimal markups for heterogeneous retailers when the prices of all their inputs are exogenous. The model predicts that, if the taste parameters are constant over time, the markups for retailers with higher market share are higher but have more flexibility, implying an incomplete pass-through of retailer input price into final retailer prices. I then focus on the exchange rate pass-through (ERPT) and use a unique data set of all the price changes of tradeable merchandise in the Mexican Consumer Price Index (CPI) data by store type to test the model. I find, consistent with the model, that (1) ERPT is different by store type; and (2) products sold in stores with negligible market share have the same ERPT regardless of the store type. Both results imply that the ERPT is estimated with bias when the store information is not used.