Strategic Relationships between Buyers and Sellers under Uncertainty

We analyze strategic relationships between buyers and sellers in markets with relationship-specific costs and exogenous dynamic uncertainty by investigating the scenario wherein a representative buyer trades with two sellers in a different country. We show that under exchange rate uncertainty, relationship-specific costs may either raise or lower competition and the level of prices in long-term contracts between buyers and sellers. Low levels of exchange rate uncertainty facilitate competition by allowing the sellers to co-exist. However, if the level of uncertainty is beyond a threshold, the only viable equilibria are those where one of the sellers captures the market.