Kyung In Hwang

Tariffs, retailers, and consumer prices

Abstract: This paper examines how market powers of retailers influence the impact of tariff reductions on consumer prices. Motivated by a theoretical framework based on an oligopolistic retail competition model with a nested CES demand, this paper considers markups charged by retailers as a new channel by which consumer prices do not fully react to tariff cuts. Using consumption-item-level consumer price index and product-level (HS 6 digit) tariff data with a new matching strategy, I find that tariff cuts incompletely pass through to consumer prices. This paper then measures market-specific retail markups proxied by average price-cost margins, and quantifies the degree to which retail markups exacerbate tariff pass-through using an instrumental variable strategy. The instrument variable estimation reveals that a 10 percentage point increase in retail markups lowers tariff pass-through to consumer prices by 1.73-1.96 percent.

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