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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