International Deviations from the Law of One Price: The Role of Search Frictions and Market Share

29 Pages Posted: 9 Nov 2004

See all articles by George Alessandria

George Alessandria

Federal Reserve Bank of Philadelphia

Abstract

This article examines the size and persistence of international deviations from the law of one price in an industry with search frictions. Cost differences lead foreign and domestic firms to price differently within countries. When local firms are more common in each country, there are large and persistent price differences across countries. Large and persistent changes in international relative costs lead to large and persistent changes in international relative prices. Dynamic considerations imply that the amount of a cost shock firms pass through to prices is U-shaped in the market share of firms receiving the shock.

Suggested Citation

Alessandria, George A., International Deviations from the Law of One Price: The Role of Search Frictions and Market Share. International Economic Review, Vol. 45, No. 4, pp. 1263-1291, November 2004. Available at SSRN: https://ssrn.com/abstract=608487

George A. Alessandria (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States
(215) 574-6402 (Phone)
(215) 574-4364 (Fax)

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