Pricing in Segmented Markets, Arbitrage Barriers, and the Law of One Price: Evidence from the European Car Market

20 Pages Posted: 21 Aug 2004

See all articles by Matthias Lutz

Matthias Lutz

Swiss National Bank; University of St. Gallen

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Abstract

The paper uses micro-level price data from the European car market to examine why there are deviations from the law of one price. The absolute law of one price is strongly rejected, but there is convergence to its relative version. Two sets of explanations are considered: (i) price-setting in segmented markets, and (ii) arbitrage barriers. Overall, the determinants of arbitrage costs have more explanatory power. The single most important factor is the distance between markets. Evidence for Belgium and Luxembourg suggests that a single currency lowers price differences significantly.

Suggested Citation

Lutz, Matthias, Pricing in Segmented Markets, Arbitrage Barriers, and the Law of One Price: Evidence from the European Car Market. Available at SSRN: https://ssrn.com/abstract=573074

Matthias Lutz (Contact Author)

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University of St. Gallen ( email )

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