The law of one price and the role of market structure

Caglayan, Mustafa and Filiztekin, Alpay (2012): The law of one price and the role of market structure.

Abstract

This paper examines the role of market structure on the persistence of price deviations from the LOP using monthly actual product prices of 47 items collected from three different types of markets in Istanbul over 1993:01-2008:12. After showing the importance of market structure on the distribution of relative prices, we implement threshold autoregressive models. We find significant differences in average threshold estimates across markets which we explain referring to differing menu costs in each market. Yet, we find no differences in average half-life estimates across markets. We argue that this is due to low search costs in Istanbul. Robustness checks verify our findings.

• Item Type: MPRA Paper
• Language: English
• Keywords: Law of one price; Nonlinearity; TAR models; Market segmentation; Menu and search costs
• Subjects: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation; F - International Economics > F3 - International Finance > F30 - General; C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C23 - Panel Data Models ; Spatio-temporal Models

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