Show Me Your Competitors and I Will Tell You If You are Exposed: Market Structure and Foreign Exchange Exposure

Abstract

We examine the impact of exchange rates on profits and prices in differentiated consumable goods markets under imperfect competition. We model the exchange rate exposure of exporting firms operating within price and quantity settings where between and within competition co-exist. We show that these two forms of competition may act as opposing forces in terms of the impact of the exchange rate on the optimal prices (quantities) and profits in both settings. Empirical tests of real and bilateral exchange rate exposure using stock price and profit data from twenty-two multinational firms, confirm the existence of a link between the ability of a firm to pass on the exchange rate changes to its customers and the magnitude of the exposure on the rival firms operating in the same market.