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The law of one price and the role of market structure

  • Caglayan, Mustafa
  • Filiztekin, Alpay

This paper examines the role of market structure on the persistence of price deviations from the LOP using monthly actual product prices of 47 items collected from three different types of markets in Istanbul over 1993:01-2008:12. After showing the importance of market structure on the distribution of relative prices, we implement threshold autoregressive models. We find significant differences in average threshold estimates across markets which we explain referring to differing menu costs in each market. Yet, we find no differences in average half-life estimates across markets. We argue that this is due to low search costs in Istanbul. Robustness checks verify our findings.

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File URL: https://mpra.ub.uni-muenchen.de/36975/1/MPRA_paper_36975.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 36975.

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Date of creation: 27 Feb 2012
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Handle: RePEc:pra:mprapa:36975
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  1. Yin-Wong Cheung & Eiji Fujii, 2008. "Deviations from the Law of One Price in Japan," CESifo Working Paper Series 2275, CESifo Group Munich.
  2. Choi, Chi-Young & Mark, Nelson C. & Sul, Donggyu, 2006. "Unbiased Estimation of the Half-Life to PPP Convergence in Panel Data," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(4), pages 921-938, June.
  3. Attila Rátfai, 2007. "The frequency and size of price adjustment: microeconomic evidence," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(7), pages 751-762.
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  7. Charles Engel & John H. Rogers, 2000. "Violating the Law of One Price: Should We Make a Federal Case Out of It?," Working Papers 0027, University of Washington, Department of Economics.
  8. M. Ege Yazgan & Hakan Yilmazkuday, 2010. "Price-Level Convergence: New Evidence from U.S. Cities," DETU Working Papers 1011, Department of Economics, Temple University.
  9. Pinelopi K. Goldberg & Frank Verboven, 2001. "Market Integration and Convergence to the Law of One Price: Evidence from the European Car Market," NBER Working Papers 8402, National Bureau of Economic Research, Inc.
  10. Cheung, Yin-Wong & Lai, Kon S., 2000. "On cross-country differences in the persistence of real exchange rates," Journal of International Economics, Elsevier, vol. 50(2), pages 375-397, April.
  11. Sarno, Lucio & Taylor, Mark P, 1997. "The Behaviour of Real Exchange Rates During the Post-Bretton Woods Period," CEPR Discussion Papers 1730, C.E.P.R. Discussion Papers.
  12. Caglayan, Mustafa & Filiztekin, Alpay & Rauh, Michael T., 2008. "Inflation, price dispersion, and market structure," European Economic Review, Elsevier, vol. 52(7), pages 1187-1208, October.
  13. Stephen G. Cecchetti & Nelson C. Mark & Robert J. Sonora, 2002. "Price Index Convergence Among United States Cities," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(4), pages 1081-1099, November.
  14. Luciana Juvenal & Mark P. Taylor, 2008. "Threshold adjustment in deviations from the law of one price," Working Papers 2008-027, Federal Reserve Bank of St. Louis.
  15. Dumas, Bernard, 1992. "Dynamic Equilibrium and the Real Exchange Rate in a Spatially Separated World," Review of Financial Studies, Society for Financial Studies, vol. 5(2), pages 153-80.
  16. Crucini, Mario J. & Shintani, Mototsugu, 2008. "Persistence in law of one price deviations: Evidence from micro-data," Journal of Monetary Economics, Elsevier, vol. 55(3), pages 629-644, April.
  17. Michael, Panos & Nobay, A Robert & Peel, David A, 1997. "Transactions Costs and Nonlinear Adjustment in Real Exchange Rates: An Empirical Investigation," Journal of Political Economy, University of Chicago Press, vol. 105(4), pages 862-79, August.
  18. Daniel Levy & Mark Bergen & Shantanu Dutta & Robert Venable, 2005. "The Magnitude of Menu Costs: Direct Evidence from Large U.S. Supermarket Chains," Macroeconomics 0505012, EconWPA.
  19. Baum, Christopher F. & Barkoulas, John T. & Caglayan, Mustafa, 2001. "Nonlinear adjustment to purchasing power parity in the post-Bretton Woods era," Journal of International Money and Finance, Elsevier, vol. 20(3), pages 379-399, June.
  20. Choudhry, Taufiq & McNown, Robert & Wallace, Myles, 1991. "Purchasing Power Parity and the Canadian Float in the 1950s," The Review of Economics and Statistics, MIT Press, vol. 73(3), pages 558-63, August.
  21. George J. Stigler, 1961. "The Economics of Information," Journal of Political Economy, University of Chicago Press, vol. 69, pages 213.
  22. Mario J. Crucini & Mototsugu Shintani & Takayuki Tsuruga, 2009. "The Law of One Price Without the Border: The Role of Distance Versus Sticky Prices," NBER Working Papers 14835, National Bureau of Economic Research, Inc.
  23. Frenkel, Jacob A., 1978. "Purchasing power parity : Doctrinal perspective and evidence from the 1920s," Journal of International Economics, Elsevier, vol. 8(2), pages 169-191, May.
  24. Murray, Christian J. & Papell, David H., 2005. "Do Panels Help Solve the Purchasing Power Parity Puzzle?," Journal of Business & Economic Statistics, American Statistical Association, vol. 23, pages 410-415, October.
  25. Sercu, Piet & Uppal, Raman & Van Hulle, Cynthia, 1995. " The Exchange Rate in the Presence of Transaction Costs: Implications for Tests of Purchasing Power Parity," Journal of Finance, American Finance Association, vol. 50(4), pages 1309-19, September.
  26. O'Connell, Paul G. J. & Wei, Shang-Jin, 2002. ""The bigger they are, the harder they fall": Retail price differences across U.S. cities," Journal of International Economics, Elsevier, vol. 56(1), pages 21-53, January.
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