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

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  • Hakan Yilmazkuday

    () (Department of Economics, Florida International University)

Abstract

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.

Suggested Citation

  • Hakan Yilmazkuday, 2016. "Constant versus Variable Markups: Implications for the Law of One Price," Working Papers 1601, Florida International University, Department of Economics.
  • Handle: RePEc:fiu:wpaper:1601
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    References listed on IDEAS

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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Constant versus Variable Markups: Implications for the Law of One Price
      by Hakan Yilmazkuday in Hakan Yilmazkuday's Blog on 2016-09-15 04:35:00

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    Cited by:

    1. repec:bla:reviec:v:25:y:2017:i:3:p:649-676 is not listed on IDEAS
    2. Hakan Yilmazkuday, 2017. "A Solution to the Missing Globalization Puzzle by Non-CES Preferences," Review of International Economics, Wiley Blackwell, vol. 25(3), pages 649-676, August.
    3. Hou, Yulin & Wang, Yun & Yilmazkuday, Hakan, 2017. "Gravity Channels in Trade," Globalization and Monetary Policy Institute Working Paper 297, Federal Reserve Bank of Dallas.

    More about this item

    Keywords

    The Law of One Price; Constant Markups; Variable Markups; Trade Costs;

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade

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