Cash Hedging Versus Responsive Pricing: Equilibrium Analysis Under Price Competition

ABSTRACT We investigate the interaction between cash hedging and responsive pricing in mitigating cash flow risks under price competition. Cash hedging smooths cash flows with financial instruments, while responsive pricing provides firms with operational flexibility to postpone pricing after the realization of cash flows. The firms' cash flows are correlated. We first investigate the equilibria in a single‐strategy game where cash hedging and responsive pricing cannot be used simultaneously. Our results show that fierce competition induces heterogeneous choices in cash hedging and responsive pricing, and this heterogeneity is amplified as cash flow correlation increases from negative to positive. We further explore the equilibria in a full game setting where cash hedging and responsive pricing can be used simultaneously. Homogeneous choices within a combined strategy often conflict with firms' profit objectives, as limited pricing flexibility and constrained cost‐reduction stability fail to effectively manage cash flow risks. Conversely, heterogeneous choices in a single strategy and a combined strategy can be advantageous, particularly in relatively stable markets.