SSE/EFI Working Paper Series in Economics and Finance
Prices, profits and exchange rate uncertainty: The case of Bertrand competition in differentiated goods.
Abstract: This paper studies a simple duopoly model of price
competition under exchange rate uncertainty with pre-set prices and
differentiated goods. Competitors come from different countries and compete
in a foreign market. We study the effect of the price setting currency
chosen on expected prices, profits and exchange rate exposure as well as
equilibrium choice of price setting currency. For a wide range of parameter
values price setting in the importer's currency is the dominant strategy.
Implications of limited exchange rate pass-through for exchange rate
exposure are dicussed. The exchange rate pass-through elasticity is shown
to be increasing in own-price effects. Parallels are drawn to the
literature on strategic trade policy.
Keywords: Pricing of exports; exchange rate pass-through; exchange rate exposure; (follow links to similar papers)
JEL-Codes: F23; (follow links to similar papers)
26 pages, September 17, 1997, Revised January 30, 1998
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