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Exchange rates and product variety

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Author Info
Witness Simbanegavi (School of Economics, University of Cape Town, South Africa)

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Abstract

We study the role of exchange rate variability in the firm's choice of whether to offer one or two varieties. We show that variability induces the firm to vertically segment markets (offer two varieties). This happens because variability in the exchange rate affects income dispersion and hence the firm's incentives to extract consumer surplus. To better extract surplus, the firm offers two price-quality menus, a high-quality variant geared for top-end surplus extraction and a low-quality variant to address market coverage concerns. Copyright © 2007 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/ijfe.362
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Publisher Info
Article provided by John Wiley & Sons, Ltd. in its journal International Journal of Finance & Economics.

Volume (Year): 14 (2009)
Issue (Month): 2 ()
Pages: 188-198
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Handle: RePEc:ijf:ijfiec:v:14:y:2009:i:2:p:188-198

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  1. Baldwin, Richard & Krugman, Paul, 1989. "Persistent Trade Effects of Large Exchange Rate Shocks," The Quarterly Journal of Economics, MIT Press, vol. 104(4), pages 635-54, November. [Downloadable!] (restricted)
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  2. Dornbusch, Rudiger, 1987. "Exchange Rates and Prices," American Economic Review, American Economic Association, vol. 77(1), pages 93-106, March.
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  3. Jaskold Gabszewicz, Jean & Shaked, Avner & Sutton, John & Thisse, Jacques-Francois, 1986. "Segmenting the market: The monopolist's optimal product mix," Journal of Economic Theory, Elsevier, vol. 39(2), pages 273-289, August. [Downloadable!] (restricted)
  4. Gabszewicz, Jean Jaskold, 1983. "Blue and Red Cars, or Blue Cars Only? A Note on Product Variety," Economica, London School of Economics and Political Science, vol. 50(198), pages 203-06, May. [Downloadable!] (restricted)
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This page was last updated on 2009-11-13.

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