Scandinavian Working Papers in Economics

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

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

Richard Friberg ()
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Richard Friberg: Dept. of Economic Statistics, Stockholm School of Economics, Postal: Stockholm School of Economics, P.O. Box 6501, S-113 83 Stockholm, Sweden

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

JEL-codes: F13; F15; F41; L40

33 pages, January 4, 2000

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