Chapter

Regional Patterns in the Law of One Price

Charles Engel and John H. Rogers

in The Regionalization of the World Economy

Published by University of Chicago Press

Published in print November 1997 | ISBN: 9780226259956
Published online February 2013 | e-ISBN: 9780226260228 | DOI: http://dx.doi.org/10.7208/chicago/9780226260228.003.0007
Regional Patterns in the Law of One Price

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The failure of the law of one price has been a puzzle for economists at least since Peter Isard's classic 1977 study. A related question in international trade has concerned the degree to which markets have become regionalized. This chapter explores whether price variability is smaller within regions than between regions, focusing on the roles of geography versus currencies. By looking at data on consumer prices, it argues that locations within a region share a unified distribution system for final goods. It first reviews some of the standard explanations for the failure of the law of one price, and then discusses how market segmentation and price discrimination can lead to failures, along with the role of sticky nominal prices. It also presents data on goods prices and examines the regressions relating price dispersion to distance and other geographic factors, variations in exchange rates, measures of trade barriers, and regional variables.

Keywords: one price; currencies; geography; price variability; consumer prices; market segmentation; price discrimination; nominal prices; exchange rates; trade barriers

Chapter.  14585 words. 

Subjects: International Economics

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