On-the-match price renegotiation: Evidence from Pakistan’s import data

Highlights

• This study examines the price discriminatory behavior of foreign sellers.

• It uses matched importer–exporter trade data for Pakistan over 2016–2017.

• We highlight the key mechanisms behind the observed price dispersion.

• Firm-to-firm prices tend to decline with the age of the buyer–seller network.

• The study analyzes the heterogeneity in pricing strategy by product types.

Abstract

Using matched importer–exporter transaction level trade data, this study offers evidence quantifying the extent of price dispersion within a foreign seller across importing firms in Pakistan. Furthermore, we examine the key mechanisms describing the pricing strategy of foreign sellers of narrowly defined product categories. We show that, within a given firm-to-firm network, importers tend to renegotiate prices on-the-match, resulting in prices to drop over time. Although these price adjustments do not differ substantially for differentiated products, foreign sellers of differentiated goods charge a significantly higher price to their newly acquired and one-shot buyers.

Introduction

A number of studies have documented substantial deviations from the law of one price (LOP) in international trade. Firms often discriminate prices across buyers to exploit the heterogeneity in their product valuation, or in the presence of information asymmetries (Varian, 1980). The pricing strategy of exporting firms has recently received considerable attention due to the availability of detailed customs trade data for many countries.

This paper uses transaction-level trade data over 2016–2017 to demonstrate the variation in prices paid by Pakistani importers. We show that foreign sellers often charge heterogeneous prices across buyers located within the same country. Our empirical methodology builds on the pricing model adopted by Fontaine et al. (2020), which allows for a two-sided unobserved heterogeneity to illustrate the dynamics of firm-to-firm price determination. The estimation results indicate that firm-to-firm prices are likely to decrease with the age of the network. We show that although the extent of price renegotiation is not significantly different for differentiated varieties of imported products, firms exporting differentiated goods are able to capture a much higher premium on their first transaction. Our findings offer useful insights, and are indicative of price bargaining that occurs between firms in a small open economy and their foreign partners.

Fig. 1 exhibits the distribution of the coefficients of variation of prices measured across importers of a narrowly defined product category within a foreign seller in a given quarter.¹ It confirms that a sizeable share of foreign sellers charge different prices across importing firms in Pakistan.² To understand the underlying causes of the observed price differences, in Fig. 2, we display density plots for the restricted samples of differentiated and homogeneous goods. The distribution for homogeneous commodities lies to the left of the distribution for differentiated goods. This is not surprising since the possibility of product differentiation, and consequently, price discrimination is lower for non-differentiated goods. Nevertheless, as indicated by Fontaine et al. (2020), we also observe considerable within seller price dispersion even for non-differentiated products, suggesting that exporting firms tend to discriminate prices across their partners by adjusting markups, and not necessarily by means of vertically differentiating their products.

We contribute to the literature on firm-to-firm trade (Bernard et al., 2012, Kugler and Verhoogen, 2012, Manova and Zhang, 2011), but our findings are also broadly related to studies on the deviations from LOP (Gopinath et al., 2011, Engel and Rogers, 1996, Goldberg and Verboven, 2005). Many recent studies reveal how market segmentation influences price dispersion across countries based on destination market characteristics. This note, on the other hand, identifies the variation of prices across buyers within a single destination. It is one of the first studies to empirically analyze pricing dynamics using detailed information on transaction-level unit values with both the buyer and seller dimensions. Although most of our findings are closely tied to those emphasized in Fontaine et al. (2020), we make several additional contributions. While their study focuses on price variation across buyers in the European Monetary Union specifically for French products, our paper examines the pricing behavior of a much broader set of exporters located all over the world competing in a small open economy. We characterize importing patterns of firms in the context of a developing country. Moreover, we utilize a more precise measure of prices, as explained in the following section, alleviating concerns regarding composition effects. Finally, this study sheds light on a specific channel at the root of pricing strategy of firms, i.e., the role of cross-border buyer–seller connections, and how it differs for differentiated products.

The rest of the paper is organized as follows. The next section briefly describes our dataset. The empirical methodology used to understand the microeconomic underpinnings of price determination and the estimation results are explained in Sections 3 Methodology, 4 Estimation results, respectively. Section 5 concludes.