“International Liberalization and Intranational Deviations from Law of One Price: Evidence from China” by Professor Puyang Sun
STRATEGY AND IB SEMINAR
Professor Puyang Sun
Professor in Economics
School of Economics
This paper investigates how international liberalization affects the intranational deviations from Low of One Price (LOP). We use a novel dataset containing monthly prices of narrowly defined products for a long period (1997-2012) covering all major cities in China to perform the analysis. The studied period witnessed a sizable reduction in importing tariff, around the year of 2002 when China became a member of WTO. We find robust evidence that international liberalization changes the intranational deviations from LOP. Specifically, reductions of importing tariffs reduce the volatility of the LOP deviation but increase the persistence of the LOP deviation. Our finding that the volatility and persistence of the LOP deviation are related to the time-varying degree of competition implies roles of market power in generating deviations from LOP in the intranational context.