The Law of One Price - a Case Study

22 Pages Posted: 18 Apr 2001

See all articles by Holger C. Wolf

Holger C. Wolf

Georgetown University - Edmund A. Walsh School of Foreign Service (SFS)

Jonathan Haskel

Imperial College Business School; Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Multiple version iconThere are 2 versions of this paper

Date Written: March 2001

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, we find typical deviations of twenty to fifty percent, though there is muted evidence for convergence over time. Such differences might be due to differences in local costs. If so, relative prices of similar products (round versus square mirrors) should be equal across countries. In fact, relative prices vary significantly across very similar goods within a product group; indeed, the ordering of common currency prices often differs for similar products. The finding suggests that differences in local distribution costs, local taxes, and probably tariffs do not explain the price pattern, leaving strategic pricing or other factors resulting in varying markups as alternative explanations for the observed divergences.

Keywords: Law of One Price, Arbitrage, Exchange Rate Passthrough, Price Setting

JEL Classification: F3, D4

Suggested Citation

Wolf, Holger C. and Haskel, Jonathan, The Law of One Price - a Case Study (March 2001). CESifo Working Paper Series No. 428. Available at SSRN: https://ssrn.com/abstract=267080

Holger C. Wolf (Contact Author)

Georgetown University - Edmund A. Walsh School of Foreign Service (SFS) ( email )

Washington, DC 20057
United States
202-687-8079 (Phone)
202-687-8359 (Fax)

HOME PAGE: http://georgetown.edu/faculty/wolfhc/

Jonathan Haskel

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom
020 7594 8563 (Phone)
020 7594 5915 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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