Pricing to market when exchange rate changes and output level matters

This dissertation clarifies the definition of Pricing to Market (PTM) and formalizes the definition. PTM in this paper focuses on the relative movements of prices in different markets, conditional on exchange rate movements. Therefore the degree of Exchange Rate Pass-Through (ERPT) itself is not important to determine the existence of PTM. But the relative degree of ERPT in different markets is crucial to conclude whether there is PTM behavior or not.; This dissertation provides the bilateral trade model that determines the output levels of two countries endogenously relative to the exchange rate and the cost of production. And it considers the output level is the reason of PTM in the model economy. The model also suggests a standard to identify the existence of PTM based on the definition of PTM.; I conclude that an incomplete ERPT is prevalent in the markets. Invoice currency has an effect on ERPT and PTM: Exporters pass through more exchange rate movements to the export price---higher degree of ERPT and the relative price difference between the domestic and the foreign market is larger---higher degree of PTM when they invoice the export price in their own currency than they do in the buyers' currency.; In addition, I find that domestic producers produce more output levels and consumers buy more domestic goods in a country if the domestic seller and the exporter charge the same price and the price increases as the exchange rate fluctuates. I also show that a country has a surplus in the trade balance if the country's currency depreciates.; In the two-period model, I tried to examine the effect of extended time period on the output level, the price, ERPT and PTM. A firm's output level, price, ERPT and PTM are affected by both its own discount factor and the other firm's discount factor. I find that second-period ERPT is higher than the first-period ERPT. On the other hand, the effect of the extended time period on the PTM behavior is indeterminate in the model economy.