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Abstract:
We find evidence that the law of one price (LOOP) holds more nearly for country
pairs that are within geographic regions than for country pairs that are not.
These findings are established using consumer price data from 23 countries
(including data from eight North American cities.) We find that failures of
LOOP are closely related to nominal exchange rate variability, suggesting a
link to sticky nominal prices. We also find that distance can explain failures
of LOOP, suggesting the failures arise from imperfect market integration.
However, these two sources do not explain all of the failures of LOOP. We
speculate that integrated marketing and distribution systems within regions
cause LOOP to hold more nearly intraregionally. We present a formal model of
marketing and distribution to illustrate this hypothesis.
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