Abstract

http://ssrn.com/abstract=2144037
 
 

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


Hakan Yilmazkuday


Florida International University

January 20, 2014


Abstract:     
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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References:  64
Citations:  2

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