Price Competition with Geometric Brownian motion in Exchange Rate Uncertainty

TL;DR

This paper models how a multinational manufacturer can optimally hedge against exchange rate uncertainty and competition in a single-period setting, analyzing capacity and pricing decisions under stochastic exchange rates.

Contribution

It introduces a model combining exchange rate uncertainty with duopoly competition to determine optimal capacities and prices for multinational firms.

Findings

Competition influences capacity and pricing strategies.

Exchange rate volatility affects market entry decisions.

Optimal policies depend on the stochastic exchange rate dynamics.

Abstract

We analyze an operational policy for a multinational manufacturer to hedge against exchange rate uncertainties and competition. We consider a single product and single period. Because of long-lead times, the capacity investment must done before the selling season begins when the exchange rate between the two countries is uncertain. we consider a duopoly competition in the foreign country. We model the exchange rate as a random variable. We investigate the impact of competition and exchange rate on optimal capacities and optimal prices. We show how competition can impact the decision of the home manufacturer to enter the foreign market.