Endogenous Market Segmentation and the Law of One Price

Richard Friberg and Kaj Martensen
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Kaj Martensen: Dept. of Economic Statistics, Stockholm School of Economics, Postal: Stockholm School of Economics, P.O. Box 6501, S-113 83 Stockholm, Sweden

No 471, SSE/EFI Working Paper Series in Economics and Finance from Stockholm School of Economics

Abstract: To the surprise of many, price deviations between markets characterized by imperfect competition have often been little affected by lower transport costs. In a Cournot model we show that if firms' decisions to segment markets are endogenous, then lower transport costs are, in many cases, associated with greater price differentials between markets. The intuition is that lower transport costs, by facilitating arbitrage, place a tighter restriction on the maximization problem and a firm is willing to take a greater cost in order to segment. We examine how the resulting equilibria depend on transport costs, product differentiation and costs of segmenting.

Keywords: price discrimination; market integration; law of one price. (search for similar items in EconPapers)
JEL-codes: D43 F15 L13 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2001-10-30
New Economics Papers: this item is included in nep-ifn and nep-mic
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Citations: View citations in EconPapers (10)

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