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Exchange rates and product variety
Author(s) -
Simbanegavi Witness
Publication year - 2009
Publication title -
international journal of finance and economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.505
H-Index - 39
eISSN - 1099-1158
pISSN - 1076-9307
DOI - 10.1002/ijfe.362
Subject(s) - economic surplus , incentive , economics , product (mathematics) , quality (philosophy) , exchange rate , price dispersion , variety (cybernetics) , dispersion (optics) , monetary economics , microeconomics , econometrics , mathematics , market economy , statistics , welfare , physics , geometry , optics , philosophy , epistemology
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.