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On Price-Setting for Identical Products in Markets without Formal Trade Barriers

  • Hassink, Wolter

    ()

    (Utrecht University)

  • Schettkat, Ronald

    ()

    (University of Wuppertal)

This paper investigates price-setting for truly homogenous products sold in markets without any formal trade barriers. We use data from IKEA, a furniture company selling identical products in an identical shopping environment in different EU countries. We get four remarkable outcomes: 1) The law of one price does not hold. 2) Country-specific effects of non-tradable cost components are important. 3) Pricing to the market surely occurs but price discrimination is limited by incomplete information. 4) The unexplained part of between-country price variation for identical products is about 75% which leaves most of the inter-country price variation unexplained.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 315.

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Length: 31 pages
Date of creation: Jun 2001
Date of revision:
Handle: RePEc:iza:izadps:dp315
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  1. Pinelopi K. Goldberg & Michael M. Knetter, 1996. "Goods Prices and Exchange Rates: What Have We Learned?," NBER Working Papers 5862, National Bureau of Economic Research, Inc.
  2. Kravis, Irving B & Lipsey, Robert E, 1977. "Export Prices and the Transmission of Inflation," American Economic Review, American Economic Association, vol. 67(1), pages 155-63, February.
  3. 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.
  4. Kasa, Kenneth, 1992. "Adjustment costs and pricing-to-market theory and evidence," Journal of International Economics, Elsevier, vol. 32(1-2), pages 1-30, February.
  5. Michael M. Knetter, 1997. "The Segmentation of International Markets: Evidence from The Economist," NBER Working Papers 5878, National Bureau of Economic Research, Inc.
  6. Isard, Peter, 1977. "How Far Can We Push the "Law of One Price"?," American Economic Review, American Economic Association, vol. 67(5), pages 942-48, December.
  7. Varian, Hal R., 1989. "Price discrimination," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 10, pages 597-654 Elsevier.
  8. 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.
  9. Frank Verboven, 1996. "International Price Discrimination in the European Car Market," RAND Journal of Economics, The RAND Corporation, vol. 27(2), pages 240-268, Summer.
  10. Knetter, Michael M, 1989. "Price Discrimination by U.S. and German Exporters," American Economic Review, American Economic Association, vol. 79(1), pages 198-210, March.
  11. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
  12. Sven W. Arndt & J. David Richardson, 1987. "Real-Financial Linkages Among Open Economies," NBER Working Papers 2230, National Bureau of Economic Research, Inc.
  13. Atish R. Ghosh & Holger C. Wolf, 1994. "Pricing in International Markets: Lessons from The Economist," Working Papers 94-21, New York University, Leonard N. Stern School of Business, Department of Economics.
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