Market power in distribution and pass-through for consumers and producers

Abstract

We examine the differential pass-through of import prices into consumer and producer prices. We develop a framework with distribution costs and distribution market power. We then examine pass-through from import prices to consumer and producer prices in the euro area using the U.S. import price as instrument. We find that pass-through rates to producer prices are more sensitive to changes in distribution margins than pass-through to consumer prices. Furthermore, only a portion of import price changes translate into domestic price changes limiting potential consumer benefits from tariff liberalization, with market power in distribution services being one important factor reducing pass-through.