Cost Pass-Through in the U.S. Automobile Market

We study cost pass-through in the U.S. automobile market using a framework that incorporates the effects of cost changes on input decisions. We find that accounting for firms' factor-market decisions significantly increases measured cost pass-through, although we reject the hypothesis of full cost pass-through and constant mark-ups. In addition, our evidence suggests that cost shocks common to all manufacturers have greater effect on prices than do model-specific cost shocks. Finally, we examine how pass-through varies with manufacturer nationality, finding that U.S. firm cost pass-through exceeds that of European and Asian firms.