Accounting for Incomplete Pass-Through

Recent theoretical work has suggested a number of potentially important factors in causingincomplete pass-through of exchange rates to prices, including markup adjustment, local costsand barriers to price adjustment. We empirically analyze the determinants of incomplete passthroughin the coee industry. The observed pass-through in this industry replicates key featuresof pass-through documented in aggregate data: prices respond sluggishly and incompletely tochanges in costs. We use microdata on sales and prices to uncover the role of markup adjustment,local costs, and barriers to price adjustment in determining incomplete pass-through using astructural oligopoly model that nests all three potential factors. The implied pricing modelexplains the main dynamic features of short and long-run pass-through. Local costs reducelong-run pass-through by a factor of 59% relative to a CES benchmark. Markup adjustmentreduces pass-through by an additional factor of 33%, where the extent of markup adjustmentdepends on the estimated \super-elasticity" of demand. The estimated menu costs are small(0:23% of revenue) and have a negligible eect on long-run pass-through, but are quantitativelysuccessful in explaining the delayed response of prices to costs. We nd that delayed passthroughin the coee industry occurs almost entirely at the wholesale rather than the retaillevel.