Fredrik Gallo: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden
Abstract: Recent research on endogenous market segmentation finds that a monopoly’s expected profit under perfectly segmented markets increases (relative to its profits under perfectly integrated markets) with exchange rate volatility. The firm thus has an incentive to make consumer resale increasingly difficult. We show that such an incentive may be absent for two firms competing in a Cournot fashion. While limitless consumer arbitrage forces a monopolist to deviate from its optimal pricing policies, it acts as a “disciplining device” helping the Cournot duopoly to approach and commit to the cartel solution in some markets. The firms’ total profit may hence be higher when they engage in integrated-market pricing and neither firm would have an incentive to take on additional costs to facilitate segmenting.
19 pages, May 14, 2010
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