Exchange Rate Pass-Through in an International Duopoly model with Brand Loyalty

Abstract

In many markets, consumers who have previously purchased from one firm have (or perceive) costs of switching to a competitor's product. This study explicitly analyzes, in an international duopoly model with brand loyalty, the effect of rival exchange rate on exchange rate pass-through. In the case of the imperfect foresight, the exchange rate pass-through is affected by the exchange rate uncertainty. Due to the brand loyalty, current price decisions will affect future profits through market shares. The expected future profit is affected by expected competition situations that depend on the interactive movement of future exchange rates. [F31, F12]