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

No 351:
One good - two prices

Marcus Asplund and Richard Friberg ()

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; (follow links to similar papers)

JEL-Codes: F15; F30; F36; (follow links to similar papers)

23 pages, January 26, 2000

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This paper is forthcoming as:
Asplund, Marcus and Richard Friberg, 'One good - two prices', American Economic Review.



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