A general assumption in international macroeconomics is that the same good must sell for the same price, adjusted for exchange rate, throughout the world: the so-called law of one price (LOOP). Pricing-to-market theory (PTM) provides an explanation of the deviation from the LOOP. The PTM has been developed in the strand of economic literature that emphasises the role of imperfect competition in trade. According to this theory, there are some classes of goods (e.g. cars) for which producers can charge different prices in different countries. Hence, firms take advantage of their market power and discriminate by charging a destination-specific mark-up on the marginal cost. Consistently with the theory of price discrimination, the mark-up tends to be higher where the elasticity is lower.

Editor: Lorenzo CARBONARI

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