Exchange Rates and Concurrent Leasing and Selling in Durable-Goods Monopoly |
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Authors: | Gregory E Goering Michael K Pippenger |
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Institution: | (1) Department of Economics, University of Alaska, P.O. Box 756080, Fairbanks, AK 99775-6080, USA |
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Abstract: | Theoretical durable-goods models suggest that a monopolist will prefer to lease rather than sell units of output due to the
seller’s commitment problem with potential buyers. However, many monopolistic durable-goods manufactures are commonly observed
simultaneously leasing and selling output. We provide a theoretical rationale for this observed behavior in firms engaged
in trade with a foreign country. In a simple two-period setting we show that a foreign durable-goods monopolist will concurrently
lease and sell output if the expected future exchange rate is lower than the current rate. With this concurrent strategy the
firm earns higher profit than a pure rental or sales regime. Additionally, our model provides additional theoretical underpinnings
for the empirical finding that increases in expected future exchange rates increase the current sales price of durable products.
Finally, our analysis examines the role of product durability in determining exchange rate pass-though to domestic prices.
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Keywords: | Monopoly Durable-goods Exchange rates |
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