Richard Friberg: Dept. of Economics, Stockholm School of Economics, Postal: P.O. Box 6501, S-113 83 Stockholm, Sweden
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.
26 pages, First version: September 17, 1997. Revised: January 30, 1998.
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