Abstract
This paper analyses price differences of McDonald’s products in four different countries. I show that pricing at pricing points in different currencies may contribute to explaining deviations from the law of one price. Observing strictly equal prices is more probable if prices are set at psychological and fractional pricing points in a common currency. The latter is also found to reduce the size of price deviations. Additionally, price differences increase as transaction costs increase. Based on this data set there is no evidence that the euro has reduced price deviations.
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Notes
For a description of the database see http://eiu.enumerate.com.
They are always collected within the same week.
The issue of pricing at pricing points is mostly analysed in the retail and marketing literature. Schindler and Kibarian (1996) for example report that psychological pricing increases consumer spending. However, see Kashyap (1995) for an analysis of nominal price rigidities using catalogue prices and Basu (1997) for a theoretical explanation of why retailers and producers price in ‘9s’.
I am only comparing prices in same quantities.
It is possible that two prices are identical for locations not participating in the Belgo-Luxembourg monetary association prior to January 2002. This is as national prices are divided by the respective irrevocably fixed exchange rates and rounded to the nearest decimal cent.
This is also confirmed by a LOGIT random-effects regression analogous to the presented TOBIT regression.
Lutz (2003) also reports increasing price differences for Big Mac prices following the euro cash changeover.
References
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Acknowledgments
I would like to thank the anonymous referee, my discussant Bengt Assarsson and the participants at the SNEE conference in Mölle, Sweden for their helpful comments.
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Opinions expressed in this paper are personal opinions of the author and do not necessarily reflect those of the Banque centrale du Luxembourg.
Appendix
Appendix
See Table 7
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Mathä, T.Y. Regional Mc parity: do common pricing points reduce deviations from the law of one price?. Rev World Econ 145, 155–166 (2009). https://doi.org/10.1007/s10290-009-0005-6
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DOI: https://doi.org/10.1007/s10290-009-0005-6