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


  • Matthias Lutz


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. Copyright Blackwell Publishing Ltd 2004.

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  • 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

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    References listed on IDEAS

    1. 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.
    2. Flam, H. & Nordstrom, H., 1995. "Why Do Pre-Tax Prices Differ so Much Across European Countries?," Papers 591, Stockholm - International Economic Studies.
    3. Flam, Harry & Nordström, Håkan, 1995. "Why do Pre-tax Car Prices Differ so Much Across European Countries?," CEPR Discussion Papers 1181, C.E.P.R. Discussion Papers.
    4. Froot, Kenneth A. & Kim, Michael & Rogoff, Kenneth, 1995. "The Law of One Price Over 700 Years," Working Papers 95-13, C.V. Starr Center for Applied Economics, New York University.
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