Abstract
An industry pricing equation that assumes heterogeneous product and imperfect competition is derived from firm behaviour. The equation is estimated for 10 countries from annual data that are pooled across 24 ISIC industries and the years 1970–1991. The results indicate that the pattern of demand shift influences on Japanese industry pricing in the short-run is different from other countries, with demand for manufactures dominating competing foreign prices. More generally, the influence of competing foreign price on domestic industry price increases with openness. Neither the law of one price nor a fixed markup is supported by the data. Competing foreign price is found to be endogenous for large economies, but not for small economies, underlining the central role of large economies in determining the global transmission of prices. The demand response of firms in competitor countries is one mechanism that allows this to occur.
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