Is 'Three' a Lucky Number? Exchange-Rate Exposure in a 'Rule of Three' Model

Abstract

We examine an international “Rule of Three” (RoT) market that allows within and between countries competition. The addition of a domestic competitor increases the exchange-rate exposure of both competing firms relative to a duopoly, unless the exchange-rate passthrough of one of its rivals is elastic. The exposure gap between the RoT market and the international duopoly increases in the long run for the domestic firm. The long-run exposure of that firm can be higher or lower than its short-run exposure, while the foreign monopolist has a smaller long-run exposure.

Keywords: Rule of Three market, Exchange-rate exposure, Switching costs, Short run, Long run

JEL Classification: L13