Exchange-Rate Exposure in a 'Rule of Three' Model
24 Pages Posted: 22 May 2018 Last revised: 19 Jul 2018
Date Written: May 9, 2018
We examine exchange-rate exposure in an international Bertrand model of differentiated goods using a “Rule of Three” (RoT) market structure that allows both within and between countries competition. We construct two versions of the model, a static and a dynamic one. In the static version, the existence of a domestic competitor increases the firm’s exposure, while the effect on its foreign competitor is ambiguous. In the dynamic version, we explore how the intertemporal effects of exchange rates on the optimal prices of a firm’s domestic and international rivals will affect the firm’s long-run in relation to its short-run exposure. The gap in exposure between the RoT market and the international duopoly is larger in the long run than in the short run for the company facing domestic competition. The exposure for that firm can be either smaller or larger in the long run relative to the short run. Finally, the firm that remains a domestic monopolist has a smaller exposure in the long run as compared to the short run.
Keywords: Rule of Three Market; Bertrand Model; Foreign Exchange; Long-Run Exposure; Short-Run Exposure
JEL Classification: L13; D21; F31
Suggested Citation: Suggested Citation