SSE/EFI Working Paper Series in Economics and Finance
No 471:
Endogenous Market Segmentation and the Law of One Price
Richard Friberg ()
and Kaj Martensen
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.; (follow links to similar papers)
JEL-Codes: D43; F15; L13; (follow links to similar papers)
28 pages, October 30, 2001
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