Working Paper: CEPR ID: DP2187
Authors: Jonathan Haskel; Holger Wolf
Abstract: We use retail transaction prices for a multinational retailer to examine the extent and permanence of violations of the law of one price (LOOP) for identical products sold in a variety of countries. We find median deviations of twenty to fifty percent. The differences are not systematic across very similar goods within a product group (e.g. two types of mirrors), nor across product groups, ruling out differences in local distribution costs as an explanation of violations of the LOOP, and pointing instead to differences in mark-ups. While divergences are large at a point in time, both their extent and their duration is limited, suggesting the presence of significant indirect competitive pressures.
Keywords: arbitrage; exchange rate; passthrough; pricesetting; mean reversion; imperfect competition; law of one price
JEL Codes: D40; E30; F41; L81
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| local distribution costs (D39) | price deviations from the law of one price (F31) |
| markups (D43) | price deviations from the law of one price (F31) |
| competitive pressures (L11) | price differences (P22) |
| price differences (P22) | decrease over time (D15) |
| initially largest price disparities (P22) | competitive pressures influence pricing (L11) |