Price Uncertainty and the Price Discriminating Firm in International Trade

Abstract

The firm operating in an uncertain environment was initially analyzed in detail by Sandmo [1971] and by Leland [1972]. Since these early papers many extensions to the analysis have been explored by such writers as Batra and Ullah [1974], Mayer [1975], Hartman [1976], Holthausen [1976], Stewart [1978], Paroush and Kahana [1979], anid Katz and Paroush [ 1979]. This paper investigates the optimal policy of' a pr-ice discriminating firm which operates under pr-ice uncertainty in one of two markets. The main motivation for the analysis comes from the problems of a firm which sells its output both domestically and abroad. Such a firm often has nearly full information about the domestic market b)ut faces uncertainty in foreign markets. In particular, the firm which has its utility defined over profits denominated in terms of domestic currency will regard the profits on its foreign sales as uncertain given excha nge rate variability even if it has full information about all other conditions in the foreign market. Hence the paper may be regarded both as an extension to the above mentioned analyses of the firm under uncertainty and as an attempt to throw light on the activities of firms involved in international trade. The treatment, being essentially of a mricroeconomic nature, is clearly different from that of such writers as Batra [1-975] and Helpman and Razin [1979], which are essentially macroeconomic treatments.