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Pricing in Segmented Markets, Arbitrage Barriers, and the Law of One Price: Evidence from the European Car Market

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  • Matthias Lutz

Abstract

The paper uses micro‐level price data from the European car market to examine why there are deviations from the law of one price. The absolute law of one price is strongly rejected, but there is convergence to its relative version. Two sets of explanations are considered: (i) price‐setting in segmented markets, and (ii) arbitrage barriers. Overall, the determinants of arbitrage costs have more explanatory power. The single most important factor is the distance between markets. Evidence for Belgium and Luxembourg suggests that a single currency lowers price differences significantly.

Suggested Citation

  • 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, August.
    • Handle: RePEc:bla:reviec:v:12:y:2004:i:3:p:456-475
    DOI: 10.1111/j.1467-9396.2004.00461.x
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    References listed on IDEAS

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