Constant versus variable markups: Implications for the law of one price

Hakan Yilmazkuday

International Review of Economics & Finance, 2016, vol. 44, issue C, 154-168

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; Quality (search for similar items in EconPapers)
JEL-codes: F12 F13 F14 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:44:y:2016:i:c:p:154-168

DOI: 10.1016/j.iref.2016.04.003

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