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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- GABSZEWICZ, Jean J. & SHAKED, Avner & SUTTON, John & THISSE, Jacques-François, .
"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).
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The Quarterly Journal of Economics,
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"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).
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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.
- Dornbusch, Rudiger, 1987.
"Exchange Rates and Prices,"
American Economic Review,
American Economic Association, vol. 77(1), pages 93-106, March.
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