Collusion with Fluctuating Exchange Rates: A Note

Author: FEUERSTEIN S.

Source: International Journal of the Economics of Business, Volume 11, Number 1, February 2004 , pp. 107-116(10)

Publisher: Routledge, part of the Taylor & Francis Group

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Abstract:

A fluctuating exchange rate has an impact on how firms value a given stream of profits, thereby affecting the ability of an international oligopoly to collude implicitly. The conversion effect arises because the foreign firm maximizes its profits earned on the home market measured in foreign currency. The discount factor effect captures the fact that exchange rate fluctuations are connected with fluctuations in the interest rates, thereby changing the present value of future profits. Although each effect refers to only one of the firms, considered together they have an identical impact on the home and the foreign firm. If the foreign country is small, the conversion effect and the discount factor effect exactly offset each other. Otherwise, the effects analysed make collusion more difficult to sustain.

Keywords: Implicit Collusion; International Oligopoly; Fluctuating Exchange Rate; D43, F12, L13

Document Type: Research article

DOI: http://dx.doi.org/10.1080/1357151032000172264

Publication date: 2004-02-01

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