Price Competition with Geometric Brownian motion in Exchange Rate Uncertainty

Abstract

We analyze an operational policy for a multinational manufacturer to hedge against exchange rate uncertainties and competition. We consider a single product and single period. Because of long-lead times, the capacity investment must done before the selling season begins when the exchange rate between the two countries is uncertain. we consider a duopoly competition in the foreign country. We model the exchange rate as a random variable. We investigate the impact of competition and exchange rate on optimal capacities and optimal prices. We show how competition can impact the decision of the home manufacturer to enter the foreign market.