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Market power of firms and exchange-rate fluctuations

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  • Meckl, Jürgen

Abstract

This paper explores the potential of firms to restrict industry outputs (market power) in oligopolistically organized markets where domestic firms compete with foreign ones. Within a stochastic price-setting supergame framework, market power is shown to be lower in general with flexible exchange rates for the following reasons, (i) The conditions that the fully collusive outcome-oligopolists maximizing joint profits-is sustainable in equilibrium become stronger if the exchange rate fluctuates, provided that fluctuations are sufficiently small, (ii) Even if full collusion can be sustained, industry outputs will be higher on the average with flexible than with fixed exchange rates.

Suggested Citation

  • Meckl, Jürgen, 1995. "Market power of firms and exchange-rate fluctuations," Discussion Papers, Series II 278, University of Konstanz, Collaborative Research Centre (SFB) 178 "Internationalization of the Economy".
    • Handle: RePEc:zbw:kondp2:278
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    References listed on IDEAS

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    1. James W. Friedman, 1971. "A Non-cooperative Equilibrium for Supergames," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 38(1), pages 1-12.
    2. Rotemberg, Julio J & Saloner, Garth, 1986. "A Supergame-Theoretic Model of Price Wars during Booms," American Economic Review, American Economic Association, vol. 76(3), pages 390-407, June.
    3. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, April.
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