Prices, profits and exchange rate uncertainty: The case of Bertrand competition in differentiated goods

Richard Friberg

No 196, SSE/EFI Working Paper Series in Economics and Finance from Stockholm School of Economics

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.

Keywords: Pricing of exports; exchange rate pass-through; exchange rate exposure (search for similar items in EconPapers)
JEL-codes: F23 (search for similar items in EconPapers)
Pages: 26 pages
Date: 1997-09-17, Revised 1998-01-30
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Citations: View citations in EconPapers (1)

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