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

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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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Matthias Lutz

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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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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Christos Cabolis & Sofronis Clerides & Ioannis Ioannou & Daniel Senft, 2005. "A Textbook Example of International Price Discrimination," University of Cyprus Working Papers in Economics 3-2005, University of Cyprus Department of Economics. [Downloadable!]
Other versions:
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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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- Joseph Francois & Ian Wooton, 2004. "Market Structure in Services and Market Access in Goods," Tinbergen Institute Discussion Papers 04-050/2, Tinbergen Institute. [Downloadable!]
- Francois, Joseph & Wooton, Ian, 2005. "Market Structure in Services and Market Access in Goods," CEPR Discussion Papers 5135, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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Yilmazkuday, Hakan, 2009. "Is there a Role for International Trade Costs in Explaining the Central Bank Behavior?," MPRA Paper 15951, University Library of Munich, Germany. [Downloadable!]
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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- Lutz, Matthias, 2003. "Price Convergence under EMU? First Estimates," Royal Economic Society Annual Conference 2003 143, Royal Economic Society. [Downloadable!]
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!]
Other versions:
- Marios Zachariadis, . "Productivity and Prices in Europe: Micro-Evidence for the Period 1975 to 1990," Departmental Working Papers 2002-12, Department of Economics, Louisiana State University. [Downloadable!]
Joseph Francois & Ian Wooton, 2008. "Market Structure and Market Access," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
Other versions:
- Joseph F. Francois & Ian Wooton, 2007. "Market structure and market access," Economics working papers 2007-06, Department of Economics, Johannes Kepler University Linz, Austria. [Downloadable!]
- Francois, Joseph & Wooton, Ian, 2007. "Market structure and market access," Policy Research Working Paper Series 4151, The World Bank. [Downloadable!]

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