One good - two prices

Marcus Asplund and Richard Friberg

No 351, SSE/EFI Working Paper Series in Economics and Finance from Stockholm School of Economics

Abstract: We examine deviations from the law of one price (LOP) with price data from duty-free outlets where each product, at a given location, has its price quoted in (at least) two currencies. Reluctance to adjust relative prices for "small" deviations from LOP allows prices to differ by up to 7-10 percent. Deviations below this level can be very persistent and last up to a decade. Even after accounting for costs of exchanging currency, there are periods with arbitrage opportunities. However, if exchange rates bring prices further out of line then the outlets adjust nominal prices to reduce the deviations from LOP.

Keywords: law of one price; market segmentation; price discrimination; purchasing power parity (search for similar items in EconPapers)
JEL-codes: F15 F30 F36 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2000-01-26
New Economics Papers: this item is included in nep-ifn and nep-ind
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Citations:

Forthcoming in American Economic Review.

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Persistent link: https://EconPapers.repec.org/RePEc:hhs:hastef:0351

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