Pricing in Segmented Markets, Arbitrage Barriers, and the Law of One Price: Evidence from the European Car Market
- 30 July 2004
- journal article
- Published by Wiley in Review of International Economics
- Vol. 12 (3) , 456-475
- https://doi.org/10.1111/j.1467-9396.2004.00461.x
Abstract
The paper uses micro‐level price data from the European car market to examine why there are deviations from the law of one price. The absolute law of one price is strongly rejected, but there is convergence to its relative version. Two sets of explanations are considered: (i) price‐setting in segmented markets, and (ii) arbitrage barriers. Overall, the determinants of arbitrage costs have more explanatory power. The single most important factor is the distance between markets. Evidence for Belgium and Luxembourg suggests that a single currency lowers price differences significantly.Keywords
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