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Exchange rates and product variety


  • Witness Simbanegavi

    (School of Economics, University of Cape Town, South Africa)


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.

Suggested Citation

  • Witness Simbanegavi, 2009. "Exchange rates and product variety," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 14(2), pages 188-198.
  • Handle: RePEc:ijf:ijfiec:v:14:y:2009:i:2:p:188-198 DOI: 10.1002/ijfe.362

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    References listed on IDEAS

    1. Friberg, Richard, 2001. "Two monies, two markets?: Variability and the option to segment," Journal of International Economics, Elsevier, vol. 55(2), pages 317-327, December.
    2. 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.
    3. Richard Baldwin & Paul Krugman, 1989. "Persistent Trade Effects of Large Exchange Rate Shocks," The Quarterly Journal of Economics, Oxford University Press, vol. 104(4), pages 635-654.
    4. Dornbusch, Rudiger, 1987. "Exchange Rates and Prices," American Economic Review, American Economic Association, vol. 77(1), pages 93-106, March.
    5. 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 203-206, May.
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    Cited by:

    1. Harald Badinger, 2012. "Die Auswirkungen des Euro auf den Außenhandel der EU und Österreichs," FIW Policy Brief series 015, FIW.

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    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies


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