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Abstract
We employ a vertical differentiation model to examine the potential bias in pricing-to-market
(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.