World Price Transmission for Differentiated Products: The Case of Shrimp in the US Market.

The traditional approach to testing the law of one price is modified to allow for product differentiation. Applying the modified framework to the US market for shrimp, the pass-through elasticity of the import price into the domestic price was found to be less than one, as predicted by theory when domestic and imported versions of a good are imperfect substitutes. Among the supply and demand shifters included in the model, the most important variables to affect the domestic price are exchange rate and the price of diesel fuel. The pass-through elasticities for diesel fuel (0.38) and exchange rate (0.55) are almost as large as for import price (0.60). This suggests changes in exchange rates and fuel prices are not to be overlooked as important drivers of the domestic price. The US market for shrimp is highly efficient, with 70% of disequilibrium caused by a demand or supply shock “corrected” within one month. [ABSTRACT FROM AUTHOR]