Domestic and Foreign Sales When Prices in Both Markets are Uncertain

This paper obtains comparative static results for a firm that sells a single output domestically and abroad when prices in both markets are uncertain. Results are obtained for both constant absolute risk aversion and for Ross decreasing absolute risk aversion, using a diagrammatic analysis which exp...

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Bibliographic Details
Published in:Bulletin of economic research 2003-04, Vol.55 (2), p.125-148
Main Authors: Dalal, Ardeshir J., Raju, Sudhakar S.
Format: Article
Language:English
Subjects:
Comparative analysis
Economic models
Economics
Enterprises
Market prices
Prices
Risk aversion
Sales
Statistical analysis
Studies
Uncertainty
Utility functions
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Summary:This paper obtains comparative static results for a firm that sells a single output domestically and abroad when prices in both markets are uncertain. Results are obtained for both constant absolute risk aversion and for Ross decreasing absolute risk aversion, using a diagrammatic analysis which exploits the properties of expected marginal utility contours. The results depend crucially on whether foreign and domestic sales are net substitutes or complements. The model is more complex and yields fewer unambiguous results – particularly in the case of substitutes – than when there is price uncertainty in only one market.
ISSN:0307-3378
1467-8586
DOI:10.1111/1467-8586.00166