Food inflation pass‐through from agricultural imports in a small open economy

Abstract

This paper develops a new framework for quantifying cost pass‐through in a small open economy by estimating firm‐level markup responses to agricultural import price shocks. We show theoretically that markup adjustments depend on firms' reliance on imported inputs and demand curvature, generating heterogeneous inflationary effects across firm types. For empirical implementation, we postulate a Leontief production structure that expresses pass‐through elasticity as a function of observed markup behavior and imported crop dependence. Using data on 10,911 South Korean food manufacturers from 2000 to 2021, we document considerable market power and increasing polarization in markups, particularly led by high‐markup firms. Markup elasticities under strategic pricing decisions differ across sectors and firm types, with particularly strong effects for non‐large firms exhibiting low reliance on imported crops. Our firm‐level pass‐through measure reveals stable aggregate patterns over time but uncovers considerable heterogeneity—most notably, rising pass‐through among firms less dependent on foreign crops. These findings illustrate how cost shocks propagate through strategic pricing and underscore the importance of firm heterogeneity in evaluating equilibrium pass‐through.