Effects of Exchange Rate Volatility on Behaviors of Affliate Firms in a Foreign Oligopoly under the Revision of Supply Chains

This paper investigates the changes in exchange rate volatility on an international oligopolistic market in a foreign country that accepts n affiliate firms through foreign direct investment (FDI) from a home country. Under the revision of the supply chains of essential products such as high-tech products, the affiliate firms are forced to procure their essential intermediate products from firms in their home country, even though they are expensive. We derive a Cournot equilibrium of the oligopolistic foreign market, in which affiliate firms compete with foreign firms under foreign exchange rate uncertainty when the number of affiliates, n, is exogenously given. In the equilibrium, we show the affiliate firms/the foreign firms aggressively expand their outputs when the relative risk aversion coefficient is large /small at equilibrium. Affiliate firms may earn ex-post expected profits less than the expected profits of the foreign firms even when the relative risk aversion coefficient is small at equilibrium. However, whether the change in the foreign exchange rate may be profitable for the ex-post profits of the affiliate and parent firms is indeterminate.