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One good - two prices

  • Asplund, Marcus

    (Dept. of Economics, Stockholm School of Economics)

  • Friberg, Richard


    (Dept. of Economics, Stockholm School of Economics)

We examine deviations from the law of one price (LOP) with price data from duty-free outlets where each product, at a given location, has its price quoted in (at least) two currencies. Reluctance to adjust relative prices for "small" deviations from LOP allows prices to differ by up to 7-10 percent. Deviations below this level can be very persistent and last up to a decade. Even after accounting for costs of exchanging currency, there are periods with arbitrage opportunities. However, if exchange rates bring prices further out of line then the outlets adjust nominal prices to reduce the deviations from LOP.

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Paper provided by Stockholm School of Economics in its series SSE/EFI Working Paper Series in Economics and Finance with number 351.

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Length: 23 pages
Date of creation: 26 Jan 2000
Date of revision:
Publication status: Forthcoming in American Economic Review.
Handle: RePEc:hhs:hastef:0351
Contact details of provider: Postal: The Economic Research Institute, Stockholm School of Economics, P.O. Box 6501, 113 83 Stockholm, Sweden
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  1. Atish R. Ghosh & Holger C. Wolf, 1994. "Pricing in International Markets: Lessons From The Economist," NBER Working Papers 4806, National Bureau of Economic Research, Inc.
  2. Maurice Obstfeld & Alan M. Taylor, 1997. "Nonlinear Aspects of Goods-Market Arbitrage and Adjustment: Heckscher's Commodity Points Revisited," NBER Working Papers 6053, National Bureau of Economic Research, Inc.
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  5. Goldberg, Pinelopi Koujianou & Verboven, Frank, 2001. "The Evolution of Price Dispersion in the European Car Market," Review of Economic Studies, Wiley Blackwell, vol. 68(4), pages 811-48, October.
  6. Charles Engel & John H. Rogers, 1995. "How wide is the border?," Research Working Paper 95-09, Federal Reserve Bank of Kansas City.
  7. Anil K. Kashyap, 1990. "Sticky prices: new evidence from retail catalogs," Finance and Economics Discussion Series 112, Board of Governors of the Federal Reserve System (U.S.).
  8. Charles Engel, 1995. "Accounting for U.S. Real Exchange Rate Changes," NBER Working Papers 5394, National Bureau of Economic Research, Inc.
  9. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
  10. Christian J. Murray & David H. Papell, 2000. "The Purchasing Power Parity Persistence Paradigm," Econometric Society World Congress 2000 Contributed Papers 0017, Econometric Society.
  11. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, volume 1, number 5474.
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  13. Michael M. Knetter, 1997. "The Segmentation of International Markets: Evidence from The Economist," NBER Working Papers 5878, National Bureau of Economic Research, Inc.
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