Working Paper: CEPR ID: DP4983
Authors: Marcus Asplund; Richard Friberg; Fredrik Wilander
Abstract: While many studies have documented deviations from the Law of One Price in international settings, evidence is scarce on the extent to which consumers take advantage of price differentials and engage in cross border shopping. We use data from 287 Swedish municipalities to estimate how responsive alcohol sales are to foreign prices, and relate the sensitivity to the location?s distance to the border. Typical results suggest that the elasticity with respect to the foreign price is around 0.4 in the border region; moving 200 (400) kilometres inland reduces it to 0.2 (0.1). Given that cross-country price differences for alcohol and other products are often caused by taxes, our evidence has implications for the debate on tax competition/harmonization.
Keywords: cross border shopping; European integration; law of one price; tax competition; tax harmonization
JEL Codes: F15; H20; H77; R12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| distance to the border (F55) | demand elasticity with respect to foreign prices (F31) |
| foreign prices (F31) | alcohol sales (L66) |
| distance to the border (F55) | likelihood of cross-border shopping (F61) |
| distance to the border (F55) | responsiveness of local sales to price changes in Denmark (F61) |