We investigate the pass-through from exchange rates to import prices when firms' future demands depend on current market shares. Foreign firms may either raise or lower their dollar export prices when the dollar appreciates temporarily (i.e., the pass-through may be perverse) and import prices may be more sensitive to expected future than to current exchange rates. We explore whether expected future exchange rates provide a clue to the puzzling recent behavior of U.S. import prices.

The authors model an oligopoly facing uncertain demand where each firm chooses as its strategy a "supply function" relating its quantity to its price. A supply function adapts better to an uncertain environment than either a fixed price or a fixed quantity; it could be committed to through the choice of organizational structure and employee decision rules. The authors give conditions for existence and for uniqueness of a Nash equilibrium in supply functions under uncertainty. They compare the equilibrium with the Cournot and Bertrand equilibria as they vary the demand and cost curves, the number of firms, and the form of uncertainty.

A firm’s actions in one market can change competitors’ strategies in a second market by affecting its own marginal costs in that other mar-ket. Whether the action provides costs or benefits in the second market depends on (a) whether it increases or decreases marginal costs in the second market and (b) whether competitors’ products are strategic substitutes or strategic complements. The latter distinction is determined by whether more “aggressive” play (e.g., lower price or higher quantity) by one firm in a market lowers or raises compet-ing firms’ marginal profitabilities in that market. Many recent results in oligopoly theory can be most easily understood in terms of strategic substitutes and complements.