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Pricing in Segmented Markets, Arbitrage Barriers, and the Law of One Price: Evidence from the European Car Market
Author(s) -
Lutz Matthias
Publication year - 2004
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/j.1467-9396.2004.00461.x
Subject(s) - law of one price , arbitrage , economics , explanatory power , convergence (economics) , financial economics , price level , mid price , relative price , monetary economics , macroeconomics , philosophy , epistemology
The paper uses micro‐level price data from the European car market to examine why there are deviations from the law of one price. The absolute law of one price is strongly rejected, but there is convergence to its relative version. Two sets of explanations are considered: (i) price‐setting in segmented markets, and (ii) arbitrage barriers. Overall, the determinants of arbitrage costs have more explanatory power. The single most important factor is the distance between markets. Evidence for Belgium and Luxembourg suggests that a single currency lowers price differences significantly.