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Spending and Pricing to Deter Arbitrage

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  • Stephen W Salant

Abstract

This article presents examples of arbitrage deterrence from the pharmaceutical, chemical and auto industries. Based on these cases, it develops two models where a monopolist prices and spends to deter arbitrage. The models differ in whether the lower price is set by the firm or negotiated with a representative of consumers. In both models, imports into the high-price market are completely deterred, but the two markets are nonetheless linked by the threat of arbitrage. If this linkage is ignored and the absence of arbitrage is misattributed to exogenous factors, econometric estimates of firm bargaining power will be biased upwards.

Suggested Citation

  • Stephen W Salant, 2024. "Spending and Pricing to Deter Arbitrage," The Economic Journal, Royal Economic Society, vol. 134(662), pages 2638-2654.
    • Handle: RePEc:oup:econjl:v:134:y:2024:i:662:p:2638-2654.
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    File URL: http://hdl.handle.net/10.1093/ej/ueae023
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