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

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  • Thomas Y. 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://www.bcl.lu/fr/publications/cahiers_etudes/34/BCLWP034.pdf
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Bibliographic Info

Paper provided by Central Bank of Luxembourg in its series BCL working papers with number 34.

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Length: 17 pages
Date of creation: Sep 2008
Date of revision:
Publication status: published in Review of World Economics / Weltwirtschaftliches Archiv, 2009, 145(1): 155-166.
Handle: RePEc:bcl:bclwop:bclwp034

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Web page: http://www.bcl.lu/

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Keywords: Law of one price; psychological and fractional prices; European Monetary Union;

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  1. Charles Engel & John H. Rogers, 1995. "How wide is the border?," Research Working Paper 95-09, Federal Reserve Bank of Kansas City.
  2. Lutz, Matthias, 2003. "Price Convergence under EMU? First Estimates," Royal Economic Society Annual Conference 2003 143, Royal Economic Society.
  3. 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.
  4. 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.
  5. Crucini, Mario J. & Shintani, Mototsugu, 2008. "Persistence in law of one price deviations: Evidence from micro-data," Journal of Monetary Economics, Elsevier, vol. 55(3), pages 629-644, April.
  6. 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.
  7. 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.
  8. 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.
  9. 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.
  10. Thomas Mathä, 2003. "What to Expect of the Euro? Analysing Price Differences of Individual Products in Luxembourg and its Surrounding Regions," ERSA conference papers ersa03p70, European Regional Science Association.
  11. 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.
  12. 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.
  13. David Parsley Shang-Jin Wei, 2002. "Currency Arrangements And Goods Market Integration: A Price Based Approach," International Finance 0211004, EconWPA.
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