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Abstract

Pricing to market (PTM) has been examined extensively in the recent trade literature using Knetter's (1989) model. The technique is typically applied using export unit values that aggregate differentiated products. We examine the potential bias in PTM results when using export unit values using a vertical differentiation model. We find that: i) false evidence of PTM ("pseudo PTM") is always found due to aggregation when calculating export unit values, whether the law of one price (LOP) holds or not; ii)when markets are segmented, the fraction of 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 significance of the estimate increases with product differentiation.

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