Competition and exchange rate pass-through

We present a pricing-to-market model, in which the average mark-up depends on the foreign competition. We propose that the exchange rate changes affect the degree of competition and this effect increases exchange rate pass-through to the import prices. We test the implications of our model on 10 OECD countries and provide evidence that competition has an important role for the pricing decisions of firms. On average, the competition effect accounts for over 10 per cent of total exchange rate pass-through.