Scandinavian Working Papers in Economics

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

No 587: Demand and Distance: Evidence on Cross-Border Shopping

Richard Friberg (), Marcus Asplund () and Fredrik Wilander ()
Additional contact information
Richard Friberg: Dept. of Economic Statistics, Stockholm School of Economics, Postal: Stockholm School of Economics, P.O. Box 6501, SE-113 83 Stockholm, Sweden
Marcus Asplund: London Business School, Postal: Regent's Park, London , NW1 4SA, United Kingdom,
Fredrik Wilander: Dept. of Economic Statistics, Stockholm School of Economics, Postal: Stockholm School of Economics, P.O. Box 6501, SE-113 83 Stockholm, Sweden

Abstract: While many studies have documented deviations from the Law of One Price in international settings, evidence is scarce on the extent to which consumers take advantage of price differentials and engage in cross border shopping. We use data from 287 Swedish municipalities to estimate how responsive alcohol sales are to foreign prices, and relate the sensitivity to the location’s distance to the border. Typical results suggest that the elasticity with respect to the foreign price is around 0.4 in the border region; moving 200 (400) kilometers inland reduces it to 0.2 (0.1). Given that cross country price differences for alcohol and other products are often caused by taxes, our evidence has implications for the debate on tax competition/harmonization.

Keywords: Law of one price; tax competition; tax harmonization; cross border shopping; European integration.

JEL-codes: F15; H20; H77; R12

23 pages, February 28, 2005

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