Unexpected pricing-to-market in goods classified as homogeneous

This paper uses cross-country, firm-level, panel data to study how exporters from Low Income Countries (LICs) adjust their prices according to their trade partners’ characteristics. The results show that the free on board (fob) price of exports is differentiated across markets in all countries in the sample. This differentiated pricing is not commonly associated with small economies, which are normally considered price takers. This finding confirms that the law of one price does not necessarily apply to exporters in small economies. Most importantly, in contrast to existing evidence, pricing-to-market is not confined to differentiated goods, and rather also applies to homogeneous goods. In addition, this paper shows how the disparate tastes across importing countries lead pricing-to-market in homogeneous goods exported by LICs - under the assumption of variable demand elasticity of substitution (for each product across destinations).