I develop a structural model with nested CES preferences to obtain optimal markups for heterogeneousretailers when the prices of all their inputs are exogenous. The model predicts that, if thetaste parameters are constant over time, the markups for retailers with higher market share arehigher but have more flexibility, implying an incomplete pass-through of retailer input price intofinal retailer prices. I then focus on the exchange rate pass-through (ERPT) and use a unique dataset of all the price changes of tradeable merchandise in the Mexican Consumer Price Index (CPI)data by store type to test the model. I find, consistent with the model, that (1) ERPT is differentby store type; and (2) products sold in stores with negligible market share have the same ERPTregardless of the store type. Both results imply that the ERPT is estimated with bias when thestore information is not used.