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Regional Mc parity: do common pricing points reduce deviations from the law of one price?

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  • Thomas Mathä

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Abstract

This paper analyses price differences of McDonald?s products in four different countries. I show that pricing at pricing points in different currencies may contribute to explaining deviations from the law of one price. Observing strictly equal prices is more probable if prices are at psychological and fractional pricing points in a common currency. The latter is also found to reduce the size of price deviations. Additionally, price differences increase as transaction costs increase. Based on this data set there is no evidence that the euro has reduced price deviations.

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File URL: http://hdl.handle.net/10.1007/s10290-009-0005-6
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Bibliographic Info

Article provided by Springer in its journal Review of World Economics.

Volume (Year): 145 (2009)
Issue (Month): 1 (April)
Pages: 155-166

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Handle: RePEc:spr:weltar:v:145:y:2009:i:1:p:155-166

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Related research

Keywords: Law of one price; Psychological and fractional prices; European monetary union; E31; F41; R11;

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References

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  1. Thomas Mathä, 2003. "What to expect of the euro? Analysing price differences of individual products in Luxembourg and its surrounding regions," BCL working papers 8, Central Bank of Luxembourg.
  2. Charles Engel & John H. Rogers, 1994. "How Wide is the Border?," NBER Working Papers 4829, National Bureau of Economic Research, Inc.
  3. Mario J. Crucini & Mototsugu Shintani, 2002. "Persistence in Law-Of-One-Price Deviations: Evidence from Micro-Data," Vanderbilt University Department of Economics Working Papers 0222, Vanderbilt University Department of Economics, revised Jul 2004.
  4. Michael R. Pakko & Patricia S. Pollard, 1996. "For here or to go? Purchasing power parity and the Big Mac," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 3-22.
  5. David C. Parsley & Shang-Jin Wei, 1996. "Convergence to the Law of One Price Without Trade Barriers or Currency Fluctuations," NBER Working Papers 5654, National Bureau of Economic Research, Inc.
  6. 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.
  7. Robert E. Cumby, 1996. "Forecasting Exchange Rates and Relative Prices with the Hamburger Standard: Is What You Want What You Get With McParity?," NBER Working Papers 5675, National Bureau of Economic Research, Inc.
  8. David C. Parsley & Shang-Jin Wei, 2003. "The Micro-foundations of Big Mac Real Exchange Rates," IEHAS Discussion Papers 0306, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
  9. Bart Hobijn & Federico Ravenna & Andrea Tambalotti, 2004. "Menu costs at work: restaurant prices and the introduction of the euro," Staff Reports 195, Federal Reserve Bank of New York.
  10. Basu, Kaushik, 1997. "Why are so many goods priced to end in nine? And why this practice hurts the producers," Economics Letters, Elsevier, vol. 54(1), pages 41-44, January.
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