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Exchange rates and product variety

Author

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  • Witness Simbanegavi

    (School of Economics, University of Cape Town, South Africa)

Abstract

We study the role of exchange rate variability in the firm's choice of whether to offer 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 affects 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. Copyright © 2007 John Wiley & Sons, Ltd.

Suggested Citation

  • Witness Simbanegavi, 2009. "Exchange rates and product variety," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 14(2), pages 188-198.
    • Handle: RePEc:ijf:ijfiec:v:14:y:2009:i:2:p:188-198
    DOI: 10.1002/ijfe.362
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    References listed on IDEAS

    as
    1. 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.
    2. Dornbusch, Rudiger, 1987. "Exchange Rates and Prices," American Economic Review, American Economic Association, vol. 77(1), pages 93-106, March.
    3. 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.
    4. Richard Friberg, 1999. "Exchange Rates and the Firm," Palgrave Macmillan Books, Palgrave Macmillan, number 978-0-333-98237-2, December.
    5. repec:bla:econom:v:50:y:1983:i:198:p:203-06 is not listed on IDEAS
    6. Richard Baldwin & Paul Krugman, 1989. "Persistent Trade Effects of Large Exchange Rate Shocks," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 104(4), pages 635-654.
    7. GABSZEWICZ, Jean J., 1983. "Blue and red cars, or blue cars only? A note on product variety," LIDAM Reprints CORE 524, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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    Cited by:

    1. Harald Badinger & Kemal Türkcan, 2014. "Currency Unions, Export Margins, and Product Differentiation: An Empirical Assessment for European Monetary Union," Review of International Economics, Wiley Blackwell, vol. 22(1), pages 13-30, February.
    2. repec:wsr:pbrief:y:2012:i:015 is not listed on IDEAS

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