DP2926 Market Integration and Convergence to the Law of One Price: Evidence from the European Car Market

Author(s): Pinelopi Koujianou Goldberg, Frank Verboven
Publication Date: August 2001
Keyword(s): law of one price, market integration, price convergence
JEL(s): F00, L00
Programme Areas: Industrial Organization, International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=2926

This Paper exploits the unique experiment of European market integration to investigate the relationship between integration and price convergence in international markets. Using a panel data set of car prices we examine how the process of integration has affected cross-country price dispersion in Europe. We find surprisingly strong evidence of convergence towards both the absolute and the relative versions of Purchasing Power Parity. Our analysis illuminates the main sources of segmentation in international markets and suggests the type of institutional changes that can successfully reduce it.