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The Law of One Price -- A Case Study

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Author Info
Jonathan Haskel
Holger Wolf ()

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Abstract

We use retail transaction prices for a multinational retailer to examine the extent and permanence of violations of the law of one price (LOOP). For identical products, we find typical deviations of twenty to fifty percent, though there is muted evidence for convergence over time. Such differences might be due to differences in local costs. If so, relative prices of similar products (round versus square mirrors) should be equal across countries. In fact, relative prices vary significantly across very similar goods within a product group; indeed, the ordering of common currency prices often differs for similar products. The finding suggests that differences in local distribution costs, local taxes, and probably tariffs do not explain the price pattern, leaving strategic pricing or other factors resulting in varying markups as alternative explanations for the observed divergences.

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Publisher Info
Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number CESifo Working Paper No. 428.

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Date of creation: 2001
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Handle: RePEc:ces:ceswps:_428

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Related research
Keywords: Law of one price; arbitrage; exchange rate passthrough; price setting;

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Find related papers by JEL classification:
D40 - Microeconomics - - Market Structure and Pricing - - - General
F30 - International Economics - - International Finance - - - General

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  1. Kasa, Kenneth, 1992. "Adjustment costs and pricing-to-market theory and evidence," Journal of International Economics, Elsevier, vol. 32(1-2), pages 1-30, February. [Downloadable!] (restricted)
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  3. Jose M. Campa & Holger C. Wolf, 1997. "Is Real Exchange Rate Mean Reversion Caused By Arbitrage?," NBER Working Papers 6162, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Charles Engel & Michael K. Hendrickson & John H. Rogers, 1997. "Intra-national, intra-continental, and intra-planetary PPP," International Finance Discussion Papers 589, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  5. 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. [Downloadable!] (restricted)
    Other versions:
  6. Froot, Kenneth A & Klemperer, Paul D, 1989. "Exchange Rate Pass-Through When Market Share Matters," American Economic Review, American Economic Association, vol. 79(4), pages 637-54, September. [Downloadable!] (restricted)
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  7. Engel, Charles & Rogers, John H, 1996. "How Wide Is the Border?," American Economic Review, American Economic Association, vol. 86(5), pages 1112-25, December. [Downloadable!] (restricted)
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  8. Kenneth A. Froot & Kenneth Rogoff, 1996. "Perspectives on PPP and Long-Run Real Exchange Rates," NBER Working Papers 4952, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. Dixit, Avinash K, 1989. "Hysteresis, Import Penetration, and Exchange Rate Pass-Through," The Quarterly Journal of Economics, MIT Press, vol. 104(2), pages 205-28, May. [Downloadable!] (restricted)
  10. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June. [Downloadable!] (restricted)
  11. Atish R. Ghosh & Holger C. Wolf, 1994. "Pricing in International Markets: Lessons From The Economist," NBER Working Papers 4806, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  13. Gron, Anne & Swenson, Deborah L, 1996. "Incomplete Exchange-Rate Pass-Through and Imperfect Competition: The Effect of Local Production," American Economic Review, American Economic Association, vol. 86(2), pages 71-76, May.
  14. Delgado, Francisco A., 1991. "Hysteresis, menu costs, and pricing with random exchange rates," Journal of Monetary Economics, Elsevier, vol. 28(3), pages 461-484, December. [Downloadable!] (restricted)
  15. Weber, Axel A., 1997. "Sources of Purchasing Power Disparities Between the G3-Economies," Discussion Paper Serie B 419, University of Bonn, Germany. [Downloadable!]
  16. Menon, Jayant, 1995. " Exchange Rate Pass-Through," Journal of Economic Surveys, Blackwell Publishing, vol. 9(2), pages 197-231, June.
  17. Isard, Peter, 1977. "How Far Can We Push the "Law of One Price"?," American Economic Review, American Economic Association, vol. 67(5), pages 942-48, December. [Downloadable!] (restricted)
  18. Dumas, Bernard, 1992. "Dynamic Equilibrium and the Real Exchange Rate in a Spatially Separated World," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 5(2), pages 153-80. [Downloadable!] (restricted)
  19. Feenstra, Robert C. & Gagnon, Joseph E. & Knetter, Michael M., 1996. "Market share and exchange rate pass-through in world automobile trade," Journal of International Economics, Elsevier, vol. 40(1-2), pages 187-207, February. [Downloadable!] (restricted)
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  20. Mario Crucini & Chris Telmer & Marios Zachariadis, . "What can we learn from deviations from the law of one price?," GSIA Working Papers 229, Carnegie Mellon University, Tepper School of Business. [Downloadable!]
  21. Aw, Bee-Yan, 1993. "Price discrimination and markups in export markets," Journal of Development Economics, Elsevier, vol. 42(2), pages 315-336, December. [Downloadable!] (restricted)
  22. Michael M. Knetter, 1997. "The Segmentation of International Markets: Evidence from The Economist," NBER Working Papers 5878, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  23. Weber, Axel A., 1997. "Sources of Purchasing Power Disparities between the G3 Economies," Journal of the Japanese and International Economies, Elsevier, vol. 11(4), pages 548-583, December. [Downloadable!] (restricted)
  24. Fraser, Patricia & Taylor, Mark P & Webster, Allan, 1991. "An Empirical Examination of Long-Run Purchasing Power Parity as Theory of International Commodity Arbitrage," Applied Economics, Taylor and Francis Journals, vol. 23(11), pages 1749-59, November.
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  26. Benninga, Simon & Protopapadakis, Aris, 1988. "The equilibrium pricing of exchange rates and assets when trade takes time," Journal of International Money and Finance, Elsevier, vol. 7(2), pages 129-149, June. [Downloadable!] (restricted)
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