Regional Patterns in the Law of One Price: The Roles of Geography Vs. Currencies
We find evidence that the law of one price (LOOP) holds more nearly for country pairs that are within geographic regions than for country pairs that are not. These findings are established using disaggregated consumer price data from 23 countries (including data from eight North American cities). We find that failures of LOOP are closely related to nominal exchange rate variability, suggesting a link to sticky nominal prices. We also find that distance can explain failures of LOOP, suggesting the failures arise from imperfect market integration. However, these two sources do not explain all of the failure of LOOP. We speculate that integrated marketing and distribution systems within regions cause LOOP to hold more nearly intraregionally. We present a formal model of marketing and distribution to illustrate this hypothesis
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aggregate CPI American dummy arbitrage Asian burger price indexes city pairs coefficient consumer country pairs currency distance between locations elasticity of demand Electricity Health Equipment equilibrium Europe European dummy Exch exchange rate variability Exchange Rate Volatility explanatory variables exports failures final goods prices foreign country holds more nearly home country Housing Clothing Electricity ignoring fixed costs Individual goods dummies location pairs Luigi Zingales marginal costs mark-ups McDonald's burgers McDonald's hamburgers measures of trade menu cost NBER Working Papers nominal exchange rate nominal price stickiness non-tariff barriers North America pic1 pl/p price discrimination price dispersion price holds prices between locations prices of similar pricing-to-market regional dummy variables regressions contain relative price relative price volatility SD Nom set its price ſº sold standard deviation sticky prices sunk costs t-statistics White 1980 Table tariff trade barriers Trade Blocs transportation costs Wimpy's burgers zero