Pricing‐to‐Market: Price Discrimination or Product Differentiation?

We employ a vertical differentiation model to examine the potential bias in pricing‐to‐market results when using export unit values aggregating differentiated products. Our results show that: (i) false evidence of pricing‐to‐market is always found when using unit values, whether the law of one price holds or not; and (ii) the size of the bias increases with the level of product differentiation. Our simulation results support those conceptual findings. Thus, some of the positive pricing‐to‐market results in the literature could be an artifact of the product heterogeneity embodied in unit values rather than evidence of imperfect competition.