Exchange rates and product variety
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.
Volume (Year): 14 (2009)
Issue (Month): 2 ()
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References listed on IDEAS
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- 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.
- Friberg, Richard, 2000. "Two monies, two markets? Variability and the option to segment," SSE/EFI Working Paper Series in Economics and Finance 349, Stockholm School of Economics.
- Richard Baldwin & Paul R. Krugman, 1986.
"Persistent Trade Effects of Large Exchage Rate Shocks,"
NBER Working Papers
2017, National Bureau of Economic Research, Inc.
- 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.
- GABSZEWICZ, Jean J. & SHAKED, Avner & SUTTON, John & THISSE, Jacques-François, "undated".
"Segmenting the market: the monopolist's optimal product mix,"
CORE Discussion Papers RP
707, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- 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.
- Gabszewicz, Jean Jaskold, 1983.
"Blue and Red Cars, or Blue Cars Only? A Note on Product Variety,"
London School of Economics and Political Science, vol. 50(198), pages 203-206, May.
- GABSZEWICZ, Jean J., "undated". "Blue and red cars, or blue cars only? A note on product variety," CORE Discussion Papers RP 524, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Dornbusch, Rudiger, 1987.
"Exchange Rates and Prices,"
American Economic Review,
American Economic Association, vol. 77(1), pages 93-106, March.
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