In 1987 Paul Krugman published a paper where he points out that the presence of imperfect competition leads to pricing to market behaviour among the exporters. As such one has observed that there is a divergence in the export price and import price of the internationally traded products. Domestic production of the same traded products in the importing country will lead to imperfect competition. Since there is no domestic production of vehicles in Norway, the pricing to market, as defined by Krugman (1987), is a priori irrelevant in my case. In this thesis, I examine the perfect competition assumption in the market for vehicles based on Boug et al. (2005, 2013) and Benedictow and Boug (2012). I use of new and more updated data to see if the results are different from those in Boug et al. (2005, 2013) and to see if the financial crisis in 2008 has any impact on the pricing behaviour for the exporters of automobiles to Norway.
I estimate several equilibrium correction models using quarterly, seasonally unadjusted time series data for the sample period 1990-2012. I find that in the long run, there is complete exchange rate pass through in accordance with the perfect competition hypothesis. The estimate of the equilibrium correction term is 0.21, which is a rather moderate speed of adjustment of import prices towards long run equilibrium level in the event of a shock in the exchange rate or in the marginal costs. The estimate of the long run unemployment rate is not significant, therefore it can be interpreted as evidence of no pricing to market since the domestic condition does not have a role in the long run pricing behaviour. The short run estimate of the foreign prices in Norwegian currency of 0.27 is also very small in magnitude and says that, in the event of a shock, only 27% will be pass through to the import price of vehicles. I also find that the financial crisis in quarter three in 2008, which hit the Norwegian economy late in the third quarter of 2008 did not give significant changes to the pricing behaviour of the exporters.