Endogenous Market Segmentation and the Law of One Price
AbstractTo the surprise of many, price deviations between markets characterized by imperfect competition have often been little affected by lower transport costs. In a Cournot model we show that if firms' decisions to segment markets are endogenous, then lower transport costs are, in many cases, associated with greater price differentials between markets. The intuition is that lower transport costs, by facilitating arbitrage, place a tighter restriction on the maximization problem and a firm is willing to take a greater cost in order to segment. We examine how the resulting equilibria depend on transport costs, product differentiation and costs of segmenting.
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Bibliographic InfoPaper provided by Stockholm School of Economics in its series Working Paper Series in Economics and Finance with number 471.
Length: 28 pages
Date of creation: 30 Oct 2001
Date of revision:
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price discrimination; market integration; law of one price.;
Find related papers by JEL classification:
- D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
- F15 - International Economics - - Trade - - - Economic Integration
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2001-11-21 (All new papers)
- NEP-IFN-2001-11-21 (International Finance)
- NEP-MIC-2001-11-21 (Microeconomics)
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- Ganslandt, Mattias & Maskus, Keith E., 2005.
"Vertical Distribution, Parallel Trade, and Price Divergence in Integrated Markets,"
Working Paper Series
639, Research Institute of Industrial Economics.
- Ganslandt, Mattias & Maskus, Keith E., 2007. "Vertical distribution, parallel trade, and price divergence in integrated markets," European Economic Review, Elsevier, vol. 51(4), pages 943-970, May.
- Richard Friberg, 2003.
"Common Currency, Common Market?,"
Journal of the European Economic Association,
MIT Press, vol. 1(2-3), pages 650-661, 04/05.
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