EXCHANGE-RATE PASS-THROUGH AND MARKET-STRUCTURE

We consider a situation in which n firms located in market l and m fir ms located in market 2 each sell a commodity which is homogeneous with in each market but may differ between markets. All firms sell on both markets. Each market has its own currency. The market demand functions differ. We give some basic results on the effects of exchange-rate ch anges and then show the following. When these markets are independent on the cost side (constant marginal costs) and demands are linear, a r eduction in the number of firms (which might result from a merger) in market 1 increases the pass-through (of an appreciation of currency 2) in market 1 and decreases the pass-through in market 2. A similar occ urrence in market 2 has the opposite effect. We give conditions under which, with identical economies of scope linking the markets, the sign of the price changes will be reversed when the number of foreign firm s is small enough compared to the number of local firms. However, such sign reversals cannot occur in the two markets simultaneously.