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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.

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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. GABSZEWICZ, Jean J., . "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).
  2. Dornbusch, Rudiger, 1987. "Exchange Rates and Prices," American Economic Review, American Economic Association, vol. 77(1), pages 93-106, March.
  3. repec:tpr:qjecon:v:104:y:1989:i:4:p:635-54 is not listed on IDEAS
  4. 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.
  5. 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.
  6. Richard Baldwin & Paul R. Krugman, 1986. "Persistent Trade Effects of Large Exchage Rate Shocks," NBER Working Papers 2017, National Bureau of Economic Research, Inc.
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