Exchange rate adjustment and oligopoly pricing behaviour

Abstract

This paper sets out a general theoretical structure for analyzing price adjustments to cost changes within asymmetric oligopolistic markets. The theory implies that, contrary to the usual assumption, exchange rate changes may leave prices unaltered. This is explored by an empirical examination of the European car market; intracountry changes in car prices and the huge differences in U.K. and European car prices are both examined. The empirical results are in line with the theoretical implications: changes in relative supply costs are more likely to be converted into changes in price-cost margins than prices within a national oligopolistic market. Copyright 1989 by Oxford University Press.