Exchange-Rate Exposure in a 'Rule of Three' Model

24 Pages Posted: 22 May 2018 Last revised: 19 Jul 2018

See all articles by Thanos Andrikopoulos

Thanos Andrikopoulos

Hull University Business School (HUBS)

Xeni Dassiou

City University London - Department of Economics

Date Written: May 9, 2018

Abstract

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

Andrikopoulos, Athanasios and Dassiou, Xeni, Exchange-Rate Exposure in a 'Rule of Three' Model (May 9, 2018). Available at SSRN: https://ssrn.com/abstract=3175845 or http://dx.doi.org/10.2139/ssrn.3175845

Athanasios Andrikopoulos

Hull University Business School (HUBS) ( email )

Hull, HU6 7RX
United Kingdom
+44 (0) 1482 463310 (Phone)

HOME PAGE: http://www2.hull.ac.uk/hubs/about-us/our-staff/allstaff/a/andrikopoulos_a.aspx

Xeni Dassiou (Contact Author)

City University London - Department of Economics ( email )

Northampton Square
London, EC1V 0HB
United Kingdom
020 7477 0206 (Phone)
020 7477 8580 (Fax)

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