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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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  1. Mario J. Crucini & Mototsugu Shintani, 2006. "Persistence in Law-Of-One-Price Deviations: Evidence from Micro-Data," Vanderbilt University Department of Economics Working Papers 0616, Vanderbilt University Department of Economics.
  2. Parsley, David C & Wei, Shang-Jin, 1996. "Convergence to the Law of One Price without Trade Barriers or Currency Fluctuations," The Quarterly Journal of Economics, MIT Press, vol. 111(4), pages 1211-36, November.
  3. Engel, Charles & Rogers, John H, 1996. "How Wide Is the Border?," American Economic Review, American Economic Association, vol. 86(5), pages 1112-25, December.
  4. Bart Hobijn & Federico Ravenna & Andrea Tambalotti, 2006. "Menu Costs at Work: Restaurant Prices and the Introduction of the Euro," The Quarterly Journal of Economics, MIT Press, vol. 121(3), pages 1103-1131, 08.
  5. 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.
  6. David C. Parsley & Shang-Jin Wei, 2003. "The Micro-foundations of Big Mac Real Exchange Rates," IEHAS Discussion Papers 0306, Institute of Economics, Hungarian Academy of Sciences.
  7. 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.
  8. Thomas Y. Matha, 2006. "The Euro and Regional Price Differences of Individual Products in an Integrated Cross-Border Area," Journal of Common Market Studies, Wiley Blackwell, vol. 44, pages 563-580, 09.
  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.
  10. 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.
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