Oligopoly and exchange rates
- A simple linear model with product differentiation is used to examine the effects of deterministic and stochastic changes of the exchange rate on an international duopoly or oligopoly under both quantity and price competition. Results concerning exchange rate pass-through, the effects of exchange rate uncertainty, and the incentives for non-strategic real or financial hedging are found to be independent of the kind of oligopolistic interaction. If hedging is used as a strategic device either by the exporting firm or by its government, the type of oligopolistic interaction matters, creating an incentive for over-hedging under quantity competition and an incentive for under-hedging under price competition. In the appendix it is shown how the results can be extended to a more general framework.
