Author: Hens, Thorsten, Alan Kirman, and Louis Phlips
Title: Exchange Rates and Oligopoly
Abstract: We consider two duopolistic firms which both operate in two countries. The markets of the two countries are separate and each of the firms produces its good in one of these countries. We study the effect of an exchange rate change on the prices in each country and on the level of sales and of profits of each of the firms. When strong restrictions such as constant marginal costs are imposed, prices move in the "right" direction in response to an exchange rate change. However, with general cost and demand structures, even in this simple model, it is possible for prices in both countries to move in "perverse" directions.
Creation-Date: Revised November 1992
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