Publication Date

2004

Comments

Working Paper 2004-11

Abstract

We employ a vertical differentiation model to examine the potential bias in pricing-tomarket (PTM) results when using unit values aggregating differentiated products. Our results show that: i) false evidence of PTM (“pseudo PTM”) is always found when using unit values, whether the law of one price holds or not; and ii) the extent to which results are biased due to pseudo PTM increases with the level of product differentiation. Correspondingly, our simulation results suggest that: i) it is possible to get a statistically significant estimate of the exchange rate coefficient, even when there is no real PTM; ii) the probability of a false PTM finding increases with product differentiation. Pseudo PTM is the result of a change in the mix of qualities imported when the exchange rate changes.

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