Varieties as a Source of Law of One Price Deviations

Fernando Borraz and Leandro Zipitria

International Economics, 2022, issue 172, 1-14

Abstract: We analyze a new price mechanism to deviate from the Law of One Price. If stores differ in the varieties offered in a given product category, prices diverge more often regardless of distance. A simple extension to Hotelling (1929) explains this result. We test our prediction using a unique country-level detailed price database. To have one difference in variety in a product category between two stores increases the price difference by 0.6–0.8%. The store characteristics explain nearly half of the effect, which partially account for the selection of varieties. This result is robust to several controls and alternative specifications and increases as the distance between stores decreases. We offer causal evidence of the varieties-to-prices channel by exploiting an exogenous shock to store demand that changes the relative number of varieties. The results of the causal effect are in line with the baseline estimations. Our results show that store decisions on variety selection could have a significant aggregate impact on price volatility.

Keywords: Law of one price; Retail prices; Variety (search for similar items in EconPapers)
JEL-codes: D4 F40 F41 (search for similar items in EconPapers)
Date: 2022
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.sciencedirect.com/science/article/pii/S2110701722000543 (text/html)

Related works:
Journal Article: Varieties as a Source of Law of One Price Deviations (2022)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cii:cepiie:2022-q3-172-1

Access Statistics for this article

More articles in International Economics from CEPII research center Contact information at EDIRC.
Bibliographic data for series maintained by ().