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Exchange rate and market power in import price

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  • Seo, Jeong-Yun

Abstract

This study consists of three papers in the area of international market analysis, as listed in Chapter 1, 2, and 3. Each paper has its own issue and application, but the main theme behind these papers is to figure out interactions of international firms' real decisions with respect to changes in financial variables or structure attributing to the firms' behaviors. The papers focus especially on a risk-averse international firm's decision model with respect to fluctuations in exchange rates;The first two papers relate the international firm's ex-ante real decision to the portfolio theory in correspondence to recent importance of managing risk. Chapter 1 deals with interactions between diversification strategy and currency hedging by futures contracts when a competitive & risk-averse importing agent chooses optimal import quantities and hedging levels under dual uncertainties of price and exchange rate. The resulting total import level under the scheme depends significantly on the degree of correlation among relevant currencies; that is because the currency hedging virtually determines the covariance effect of portfolio variance. Chapter 2 introduces another risk-diversification model in determining the input mixture within a framework of the capital-asset-price-model. The Chinese wheat import market is empirically analyzed to justify this portfolio approach and to explain potential conflicts between the buyer's risk diversification efforts and suppliers' market power. While concentrating on the risk reduction effect, these papers support hedging roles of currency futures contracts among the advanced markets in Chapter 1 and of diversification strategy in importing non-homogenous products in Chapter 2;As an illustration of the market structure related to demand functions, Chapter 3 deals with the topic of pass-through in terms of the oligopoly pricing conduct in the market. To find out the nature of demand convexity, this study draws several testable implications and also evaluates an empirical example of the import beer pricing in the US. Given the open debate on the stability of the level of pass-through, a Kalman filter estimation is adapted in the empirical application.

Suggested Citation

  • Seo, Jeong-Yun, 1998. "Exchange rate and market power in import price," ISU General Staff Papers 1998010108000013522, Iowa State University, Department of Economics.
    • Handle: RePEc:isu:genstf:1998010108000013522
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    References listed on IDEAS

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