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Constant versus Variable Markups: Implications for the Law of One Price

Hakan Yilmazkuday

Florida International University

January 20, 2014

We compare the implications of having constant versus variable markups on the Law of One Price (LOP) by decomposing the good-category level prices into marginal costs of production, markups, and trade costs. Using trade data on both quantities and prices, together with a demand-side model, constant markups are estimated using log-linear trade regressions, while variable markups are estimated using lin-log trade regressions. Estimated markups are further used to decompose prices into their components, after controlling for quality and time-to-trade. The results show that trade costs contribute most to the deviations from LOP, especially in the case of variable markups.

Number of Pages in PDF File: 35

Keywords: Functional Separability, Variable Markups, Trade Costs, Price Elasticity of Demand, Income Elasticity of Demand

JEL Classification: F12, F13, F14

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Date posted: September 10, 2012 ; Last revised: January 21, 2014

Suggested Citation

Yilmazkuday, Hakan, Constant versus Variable Markups: Implications for the Law of One Price (January 20, 2014). Available at SSRN: http://ssrn.com/abstract=2144037 or http://dx.doi.org/10.2139/ssrn.2144037

Contact Information

Hakan Yilmazkuday (Contact Author)
Florida International University ( email )
Miami, FL 33199
United States
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