Yuriy Gorodnichenko, Oleksandr Talavera, 15 September 2014

Online markets have unusual characteristics that allow testing whether the law of one price holds. This column uses a unique dataset to demonstrate that the frictions in the price adjustments in online markets are indeed lower. The authors find that in online markets the price change is smaller, the duration of price spell – shorter, the pass-through is larger, and speed of price adjustment – faster. In the future, we can expect smaller price differentials, bringing the law of one price closer to reality.

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