Advanced Search
MyIDEAS: Login to save this paper or follow this series

What to Expect of the Euro? Analysing Price Differences of Individual Products in Luxembourg and its Surrounding Regions

Contents:

Author Info

  • Thomas Mathä

    ()

Abstract

The European price landscape is characterised by significant price differences among regions and countries for quasi-identical goods. Possible explanations include transport costs, tariffs and non-tariff barriers, market structure, etc? While the introduction of the single European currency reduces exchange rate volatility and hence price volatility across its participating member countries, it is yet unclear to which extent this also implies reductions in price dispersion across countries. Similarly, the introduction of the euro and the associated increase in price transparency will reduce consumers' transactions costs associated with cross-country price comparisons. It remains to be seen whether these transactions cost reductions are sufficient to trigger a reduction in the band of inaction within which prices can fluctuate without triggering consumer arbitrage and whether cross-country price dispersion will be induced to decrease. The latter has rather frequently been claimed to be one of the main benefits of the euro. The aim of this paper is to analyse to which extent the euro may be expected to contribute to increased regional price convergence - a topic being directly related to the euro cash changeover. It is obviously too early to evaluate the price and convergence effects, not to mention the economic benefits, brought about by the introduction of the euro. The cash changeover transition period has barely ended yet. Moreover, many economic effects will only materialise in the long-term. We use individual product prices from the Luxembourg and the surrounding regions Lorraine, Rhine-Palatinate and Walloon collected on several occasions between October 2001 and April 2002 in order to analyse the factors contributing to regional price differences. Luxembourg and its surrounding regions emerge as natural candidate for such a study. At relatively short distance to each other four countries border each other. Furthermore, these regions are highly integrated with each other, which is also apparent from the about 100 000 cross-border commuters travelling into Luxembourg every day. This reduces the obstacles, which somewhere else may effectively seal off regions against each other. The high degree of regional integration also means that a high share of the population was used to compare and pay prices in different currencies prior to the introduction of euro. If we were able to obtain statistically affirmative results in these almost ideal conditions, then this would nurture our hopes for measurable effects for the whole euro area. If this was not the case, then it may prove rather difficult to find price level convergence effects - even in the long-term. The empirical results obtained in this paper generally support the transactions cost arguments. More specifically, the absolute percentage price difference is increasing in distance, but at a decreasing rate. Similarly, crossing borders increases the price deviations, while membership to the former Belgo-Luxembourg currency union reduces price deviations. These results are rather remarkable given the high degree of homogeneity with regard to the geographical area under investigation. These results raise our hopes that the euro will be able to reduce price dispersion in the euro area in the long-term. The data set also allows us to explicitly analyse how packaging size differences influence the deviations from the law of one price. This is a particular feature of this data set, which many other international data sets do not have. The results are affirmative. The larger the differences in unit value representations the larger are price deviations. Thus, this result supports the statement of the European Commission (2001c) arguing that market structure matters. Furthermore, being part of the same retail chain matters. The results clearly suggest that price deviations are smaller on average, if the prices are observed in the same supermarket chain.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www-sre.wu-wien.ac.at/ersa/ersaconfs/ersa03/cdrom/papers/70.pdf
Download Restriction: no

Bibliographic Info

Paper provided by European Regional Science Association in its series ERSA conference papers with number ersa03p70.

as in new window
Length:
Date of creation: Aug 2003
Date of revision:
Handle: RePEc:wiw:wiwrsa:ersa03p70

Contact details of provider:
Postal: Welthandelsplatz 1, 1020 Vienna, Austria
Web page: http://www.ersa.org

Related research

Keywords:

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Jonathan Haskel & Holger Wolf, 2001. "The Law of One Price - A Case Study," NBER Working Papers 8112, National Bureau of Economic Research, Inc.
  2. Maurice Obstfeld & Kenneth Rogoff & Ben Bernanke & Kenneth Rogoff, . "The Six Major Puzzles in International Macroeconomics: Is there a Common Cause?," Working Paper 32326, Harvard University OpenScholar.
  3. Ken Froot & Kenneth Rogoff, . "Perspectives on PPP and Long-Run Real Exchange Rates," Working Paper 32027, Harvard University OpenScholar.
  4. Charles Engel & John H. Rogers, 1994. "How Wide is the Border?," NBER Working Papers 4829, National Bureau of Economic Research, Inc.
  5. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
  6. Sarno, Lucio & Taylor, Mark P, 2001. "Purchasing Power Parity and the Real Exchange Rate," CEPR Discussion Papers 2913, C.E.P.R. Discussion Papers.
  7. Stephen Cecchetti & Nelson C. Mark & Robert Sonora, 1999. "Price Level Convergence Among United States Cities: Lessons for the European Central Bank," Working Papers 99-01, Ohio State University, Department of Economics.
  8. Goldberg, Pinelopi & Verboven, Frank, 2001. "Market Integration and Convergence to the Law of One Price: Evidence from the European Car Market," CEPR Discussion Papers 2926, C.E.P.R. Discussion Papers.
  9. 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.
  10. Goldberg, Pinelopi Koujianou & Verboven, Frank, 1998. "The Evolution of Price Dispersion in the European Car Market," CEPR Discussion Papers 2029, C.E.P.R. Discussion Papers.
  11. John H. Rogers, 2002. "Monetary union, price level convergence, and inflation: how close is Europe to the United States?," International Finance Discussion Papers 740, Board of Governors of the Federal Reserve System (U.S.).
  12. Marcus Asplund & Richard Friberg, 2001. "The Law of One Price in Scandinavian Duty-Free Stores," American Economic Review, American Economic Association, vol. 91(4), pages 1072-1083, September.
  13. John H. Rogers, 2001. "Price level convergence, relative prices, and inflation in Europe," International Finance Discussion Papers 699, Board of Governors of the Federal Reserve System (U.S.).
  14. 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.
  15. Matthias Lutz, 2004. "Pricing in Segmented Markets, Arbitrage Barriers, and the Law of One Price: Evidence from the European Car Market," Review of International Economics, Wiley Blackwell, vol. 12(3), pages 456-475, 08.
  16. Pinelopi K. Goldberg & Michael M. Knetter, 1996. "Goods Prices and Exchange Rates: What Have We Learned?," NBER Working Papers 5862, National Bureau of Economic Research, Inc.
  17. David C. Parsley & Shang-Jin Wei, 2001. "Limiting Currency Volatility to Stimulate Goods Market Integration: A Price Based Approach," NBER Working Papers 8468, National Bureau of Economic Research, Inc.
  18. Shang-Jin Wei & David C. Parsley, 1995. "Purchasing Power Disparity During the Floating Rate Period: Exchange Rate Volatility, Trade Barriers and Other Culprits," NBER Working Papers 5032, National Bureau of Economic Research, Inc.
  19. Mario Crucini & Chris Telmer & Marios Zachariadis, . "Understanding European Real Exchange Rates," GSIA Working Papers 227, Carnegie Mellon University, Tepper School of Business.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Thomas Mathä, 2009. "Regional Mc parity: do common pricing points reduce deviations from the law of one price?," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 145(1), pages 155-166, April.
  2. Friberg, Richard & Matha, Thomas Y., 2004. "Does a common currency lead to (more) price equalization? The role of psychological pricing points," Economics Letters, Elsevier, vol. 84(2), pages 281-287, August.
  3. Fischer, Christoph, 2009. "Price convergence in the EMU? Evidence from micro data," Discussion Paper Series 1: Economic Studies 2009,06, Deutsche Bundesbank, Research Centre.
  4. Jan-Egbert Sturm & Ulrich Fritsche & Michael Graff & Michael Lamla & Sarah Lein & Volker Nitsch & David Liechti & Daniel Triet, 2009. "The euro and prices: changeover-related inflation and price convergence in the euro area," European Economy - Economic Papers 381, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:wiw:wiwrsa:ersa03p70. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Gunther Maier).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.