 Varieties as a Source of Law of One Price DeviationsFernando Borraz and Leandro Zipitria International Economics, 2022, vol. 172, issue C, 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) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:inteco:v:172:y:2022:i:c:p:1-14 DOI: 10.1016/j.inteco.2022.07.001 Access Statistics for this article International Economics is currently edited by Valerie Mignon and Marcelo Olarreaga More articles in International Economics from Elsevier |
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