Prices, Profits and Exchange Rate Uncertainty: The Case of Bertrand Competition in Differentiated Goods
Working Paper Series in Economics and Finance No. 196
21 Pages Posted: 17 Jan 1998
Date Written: October 2, 1997
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. 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 discussed. 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.
JEL Classification: F23
Suggested Citation: Suggested Citation