Exchange Rates and Product Variety
We study the role of exchange rate variability in the firm's choice of whether to oÂ¤er 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 aÂ¤ects 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.
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- Baldwin, Richard & Krugman, Paul, 1989.
"Persistent Trade Effects of Large Exchange Rate Shocks,"
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- 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.
- 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 203-06, May.
- 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.
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