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The Economic Research Institute, Stockholm School of Economics SSE/EFI Working Paper Series in Economics and Finance

No 349:
Two monies, two markets? Variability and the option to segment

Richard Friberg ()

Abstract: This paper examines the decision to create barriers to arbitrage for a firm selling on two national markets. Sunk costs of market segmentation imply that the option to segment markets is more valuable the greater the variability of purchasing power between markets. One result is that a monetary union may lead to market integration when a fixed exchange rate did not. Extensions examine hysterisis, transport costs and general equilibrium modeling.

Keywords: Exchange rate pass-through; law of one price; EMU; price discrimination; real options; (follow links to similar papers)

JEL-Codes: F13; F15; F41; L40; (follow links to similar papers)

33 pages, January 4, 2000

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