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Pricing-to-market and the failure of absolute PPP

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  • George Alessandria
  • Joseph Kaboski

Abstract

The authors show that deviations from the law of one price in tradable goods are an important source of violations of absolute PPP across countries. Using highly disaggregated export data, they document systematic international price discrimination: at the U.S. dock, U.S. exporters ship the same good to low-income countries at lower prices. This pricing-to-market is about twice as important as any local non-traded inputs, such as distribution costs, in explaining the differences in tradable prices across countries. The authors propose a model of consumer search that generates pricing-to-market. In this model, consumers in low-income countries have a comparative advantage in producing non-traded, non-market search activities and therefore are more price sensitive than consumers in high-income countries. They present cross-country time use evidence and evidence from U.S. export prices that are consistent with the model.

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Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 07-29.

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Date of creation: 2007
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Handle: RePEc:fip:fedpwp:07-29

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Citations

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Cited by:
  1. Ina Simonovska, 2010. "Income differences and prices of tradables," Globalization and Monetary Policy Institute Working Paper 55, Federal Reserve Bank of Dallas.
  2. Peter McQuade, 2010. "The Evolution of International Trade on the Extensive and Intensive Margins," The Institute for International Integration Studies Discussion Paper Series iiisdp325, IIIS, revised Apr 2010.
  3. Andrei A. Levchenko & Logan T. Lewis & Linda L. Tesar, 2011. "The "Collapse in Quality" Hypothesis," American Economic Review, American Economic Association, vol. 101(3), pages 293-97, May.
  4. Lakner, Christoph & Milanovic, Branko, 2013. "Global income distribution : from the fall of the Berlin Wall to the great recession," Policy Research Working Paper Series 6719, The World Bank.
  5. Eddy Bekkers & Joseph F. Francois & Miriam Manchin, 2012. "Import Prices, Income, and Inequality," wiiw Working Papers 82, The Vienna Institute for International Economic Studies, wiiw.
  6. Hakan Yilmazkuday & Mario J. Crucini, 2014. "Understanding Long-run Price Dispersion," Working Papers 1407, Florida International University, Department of Economics.
  7. Joakim Gullstrand & Karin Olofsdotter & Susanna Thede, 2014. "Markups and export-pricing strategies," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 150(2), pages 221-239, May.
  8. Mario J. Crucini & Christopher I. Telmer, 2012. "Microeconomic Sources of Real Exchange Rate Variability," NBER Working Papers 17978, National Bureau of Economic Research, Inc.
  9. Murphy, Daniel, 2013. "Why are Goods and Services more Expensive in Rich Countries? Demand Complementarities and Cross-Country Price Differences," Working Papers 636, Research Seminar in International Economics, University of Michigan.
  10. Alberto Cavallo & Brent Neiman & Roberto Rigobon, 2012. "Currency Unions, Product Introductions, and the Real Exchange Rate," NBER Working Papers 18563, National Bureau of Economic Research, Inc.
  11. Ariel Burstein & Gita Gopinath, 2013. "International Prices and Exchange Rates," NBER Working Papers 18829, National Bureau of Economic Research, Inc.
  12. David Lagakos, 2009. "Superstores or mom and pops? Technolgy adoption and productivity differences in retail trade," Staff Report 428, Federal Reserve Bank of Minneapolis.
  13. Michael J. Ferrantino & Robert M. Feinberg & Lauren Deason, 2012. "Quality Competition and Pricing-to-Market: A Unified Framework for the Analysis of Bilateral Unit Values," Southern Economic Journal, Southern Economic Association, vol. 78(3), pages 860-877, January.
  14. Eyal Dvir & Georg H. Strasser, 2013. "Does Marketing Widen Borders? Cross-Country Price Dispersion in the European Car Market," Boston College Working Papers in Economics 831, Boston College Department of Economics, revised 04 Apr 2014.
  15. Michael Ferrantino & Robert M. Feinberg & Lauren Deason, 2009. "Quality competition, Pricing-To-Market and Non-Tariff measures: A Unified Framework For the Analysis of Bilateral Unit Values," Working Papers 2009-03, American University, Department of Economics.
  16. Treb Allen, 2012. "Information Frictions in Trade," 2012 Meeting Papers 125, Society for Economic Dynamics.

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