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

Hakan Yilmazkuday

No 1601, Working Papers from Florida International University, Department of Economics

Abstract: This paper compares 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 a trade model, it is shown that the case of constant markups corresponds to log-linear trade regressions, while the case of variable markups corresponds to lin-log trade regressions. Empirical results show that marginal costs of production contribute most to the deviations from LOP for both cases of constant and variable markups; the decomposition of marginal costs further shows that destination-specific quality measures play the biggest role.

Keywords: The Law of One Price; Constant Markups; Variable Markups; Trade Costs (search for similar items in EconPapers)
JEL-codes: F12 F13 F14 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2016-04
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (21)

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https://economics.fiu.edu/research/pdfs/2016_working_papers/1601.pdf First version, 2016 (application/pdf)

Related works:
Journal Article: Constant versus variable markups: Implications for the law of one price (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:fiu:wpaper:1601

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