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Pricing in Segmented Markets, Arbitrage Barriers, and the Law of One Price: Evidence from the European Car Market

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Matthias Lutz

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Abstract

The paper uses micro-level price data from the European car market to examine why there are deviations from the law of one price. The absolute law of one price is strongly rejected, but there is convergence to its relative version. Two sets of explanations are considered: (i) price-setting in segmented markets, and (ii) arbitrage barriers. Overall, the determinants of arbitrage costs have more explanatory power. The single most important factor is the distance between markets. Evidence for Belgium and Luxembourg suggests that a single currency lowers price differences significantly. Copyright Blackwell Publishing Ltd 2004.

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File URL: http://www.blackwell-synergy.com/links/doi/10.1111/j.1467-9396.2004.00461.x/enhancedabs
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Publisher Info
Article provided by Blackwell Publishing in its journal Review of International Economics.

Volume (Year): 12 (2004)
Issue (Month): 3 (08)
Pages: 456-475
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Handle: RePEc:bla:reviec:v:12:y:2004:i:3:p:456-475

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  1. Christos Cabolis & Sofronis Clerides & Ioannis Ioannou & Daniel Senft, . "A Textbook Example of International Price Discrimination," University of Cyprus Working Papers in Economics 3-2005, University of Cyprus Department of Economics. [Downloadable!]
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  2. Mario J. Crucini & Chris I. Telmer & Marios Zachariadis, 2005. "Understanding European Real Exchange Rates," American Economic Review, American Economic Association, vol. 95(3), pages 724-738, June. [Downloadable!] (restricted)
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  3. Hans Gersbach & Hans Haller, 2007. "Hierarchical Trade and Endogenous Price Distortions," Economics working paper series 07/72, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich. [Downloadable!]
  4. Riemer P. Faber & Ad C.J. Stokman, 2005. "Price Convergence in Europe from a Macro Perspective: Product Categories and Reliability," DNB Working Papers 034, Netherlands Central Bank, Research Department. [Downloadable!]
  5. Joseph Francois & Ian Wooton, 2005. "Market Structure in Services and Market Access in Goods," The Institute for International Integration Studies Discussion Paper Series iiisdp80, IIIS. [Downloadable!]
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  6. Thomas Mathä, 2003. "What to Expect of the Euro? Analysing Price Differences of Individual Products in Luxembourg and its Surrounding Regions," BCL working papers cahier_etude_8, Central Bank of Luxembourg. [Downloadable!]
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  7. Salvador Gil-Pareja & Simón Sosvilla-Rivero, . "Price Convergence in the European Car Market," Working Papers 2005-22, FEDEA. [Downloadable!]
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  8. Christian Broda & David E. Weinstein, 2008. "Understanding International Price Differences Using Barcode Data," NBER Working Papers 14017, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. Matthias Lutz, 2002. "Beyond Burgernomics and MacParity: Exchange Rate Forecasts Based on the Law of One Price," 10th International Conference on Panel Data, Berlin, July 5-6, 2002 D4-1, International Conferences on Panel Data. [Downloadable!]
  10. Matthias Lutz, 2003. "Price Convergence under EMU? First Estimates," University of St. Gallen Department of Economics working paper series 2003 2003-08, Department of Economics, University of St. Gallen. [Downloadable!]
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  11. Marios Zachariadis, . "Productivity and Prices in Europe: Micro-Evidence for the Period 1975 to 1990," Departmental Working Papers 2004-06, Department of Economics, Louisiana State University. [Downloadable!]
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  12. Joseph Francois & Ian Wooton, 2008. "Market Structure and Market Access," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
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