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Constant versus Variable Markups: Implications for the Law of One Price

Listed author(s):
  • Hakan Yilmazkuday

    ()

    (Department of Economics, Florida International University)

This paper compares the implications of having constant versus variable markups on the Law of One Price (LOP) by decomposing the good-category level prices into marginal costs of production, markups, and trade costs. Using a trade model, it is shown that the case of constant markups corresponds to log-linear trade regressions, while the case of variable markups corresponds to lin-log trade regressions. Empirical results show that marginal costs of production contribute most to the deviations from LOP for both cases of constant and variable markups; the decomposition of marginal costs further shows that destination-specific quality measures play the biggest role.

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File URL: http://economics.fiu.edu/research/working-papers/2016/1601/1601.pdf
File Function: First version, 2016
Download Restriction: no

Paper provided by Florida International University, Department of Economics in its series Working Papers with number 1601.

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Length: 34 pages
Date of creation: Apr 2016
Handle: RePEc:fiu:wpaper:1601
Contact details of provider: Postal:
Miami, FL 33199

Phone: (305) 348-2316
Fax: (305) 348-1524
Web page: http://economics.fiu.edu

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