Technical Note - Pricing below Cost under Exchange-Rate Risk

John Park, Burak Kazaz, Scott Webster

Research output: Contribution to journalArticle

2 Scopus citations

Abstract

Pricing below cost is often classified as "dumping" in international trade and as "predatory pricing" in local markets. It is legally prohibited from practice because of earlier findings that it leads to predatory behavior by either eliminating competition or stealing market share. This study shows that a stochastic exchange rate can create incentives for a profit-minded monopoly firm to set price below marginal cost. Our result departs from earlier findings because the optimal pricing decision is based on a rational behavior that does not exhibit any malicious intent against the competition to be considered as violating anti-trust laws. The finding is a robust result, because our analysis demonstrates that this behavior occurs under various settings such as when the firm (i) is risk-averse, (ii) can postpone prices until after exchange rates are realized, (iii) is capable of manufacturing in multiple countries, and (iv) operates under demand uncertainty in addition to the random exchange rate.

Original languageEnglish (US)
Pages (from-to)153-159
Number of pages7
JournalProduction and Operations Management
Volume25
Issue number1
DOIs
StatePublished - Jan 1 2016

Keywords

  • dumping
  • exchange-rate risk
  • predatory pricing
  • pricing below cost
  • value at risk

ASJC Scopus subject areas

  • Industrial and Manufacturing Engineering
  • Management Science and Operations Research
  • Management of Technology and Innovation

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