Exchange rate expectations and market shares

We consider an asymmetric duopoly comprised of a domestic and a foreign firm. We derive optimal collusion equilibria and examine how market shares vary in response to changes in the exchange rate. Our analysis implies some surprising results. First, a temporary depreciation has a greater impact on market shares than a permanent depreciation. Second, if the change in the expected future rates is of sufficient magnitude, then the domestic firmʹs market share may decrease following a depreciation of the home currency—a “seemingly perverse effect.” © 1997 Elsevier Science S.A.