Working Paper: CEPR ID: DP2926
Authors: Pinelopi Goldberg; Frank Verboven
Abstract: This Paper exploits the unique experiment of European market integration to investigate the relationship between integration and price convergence in international markets. Using a panel data set of car prices we examine how the process of integration has affected cross-country price dispersion in Europe. We find surprisingly strong evidence of convergence towards both the absolute and the relative versions of Purchasing Power Parity. Our analysis illuminates the main sources of segmentation in international markets and suggests the type of institutional changes that can successfully reduce it.
Keywords: law of one price; market integration; price convergence
JEL Codes: F00; L00
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Market integration (F15) | Reduction in cross-country price differentials (F16) |
| Institutional changes (D02) | Price convergence (D41) |
| Exchange rate volatility (F31) | Short-term price differentials (F16) |
| Market integration (F15) | Price convergence (D41) |
| Nominal exchange rate volatility (F31) | Price dispersion (L11) |