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Exchange Rates and Concurrent Leasing and Selling in Durable-Goods Monopoly

  • Gregory Goering

    ()

  • Michael Pippenger

    ()

Theoretical durable-goods models suggest that a monopolist will prefer to lease rather than sell units of output due to the seller’s commitment problem with potential buyers. However, many monopolistic durable-goods manufactures are commonly observed simultaneously leasing and selling output. We provide a theoretical rationale for this observed behavior in firms engaged in trade with a foreign country. In a simple two-period setting we show that a foreign durable-goods monopolist will concurrently lease and sell output if the expected future exchange rate is lower than the current rate. With this concurrent strategy the firm earns higher profit than a pure rental or sales regime. Additionally, our model provides additional theoretical underpinnings for the empirical finding that increases in expected future exchange rates increase the current sales price of durable products. Finally, our analysis examines the role of product durability in determining exchange rate pass-though to domestic prices. Copyright International Atlantic Economic Society 2009

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File URL: http://hdl.handle.net/10.1007/s11293-009-9170-1
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Article provided by International Atlantic Economic Society in its journal Atlantic Economic Journal.

Volume (Year): 37 (2009)
Issue (Month): 2 (June)
Pages: 187-196

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Handle: RePEc:kap:atlecj:v:37:y:2009:i:2:p:187-196
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  1. Bulow, Jeremy I, 1982. "Durable-Goods Monopolists," Journal of Political Economy, University of Chicago Press, vol. 90(2), pages 314-32, April.
  2. Driskill, Robert A. & Horowitz, Andrew W., 1996. "Durability and strategic trade Are there rents to be captured?," Journal of International Economics, Elsevier, vol. 41(1-2), pages 179-194, August.
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  9. Kahn, Charles M, 1986. "The Durable Goods Monopolist and Consistency with Increasing Costs," Econometrica, Econometric Society, vol. 54(2), pages 275-94, March.
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  14. Bagnoli, Mark & Salant, Stephen W & Swierzbinski, Joseph E, 1989. "Durable-Goods Monopoly with Discrete Demand," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1459-78, December.
  15. Driskill, Robert, 1997. "Durable-Goods Monopoly, Increasing Marginal Cost and Depreciation," Economica, London School of Economics and Political Science, vol. 64(253), pages 137-54, February.
  16. Pinelopi Koujianou Goldberg & Michael M. Knetter, 1997. "Goods Prices and Exchange Rates: What Have We Learned?," Journal of Economic Literature, American Economic Association, vol. 35(3), pages 1243-1272, September.
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