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The Law of One Price without the Border: The Role of Distance versus Sticky Prices

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  • MarioJ. Crucini
  • Mototsugu Shintani
  • Takayuki Tsuruga

Abstract

We build a single-country, two-city, model with nominal rigidities and transport costs which predicts that variation of LOP deviations is lower for goods with infrequent price adjustment after controlling for distance. We adapt the Engel and Rogers (1996) regression to analyse Japanese retail prices at the city level and find that results are consistent with the theoretical predictions. The regression results also suggest that the distance equivalent of nominal rigidities can be as large as the 'width' of the border found in the literature on international LOP, casting doubt on casual interpretations of distance as a metric for market segmentation. Copyright © The Author(s). Journal compilation © Royal Economic Society 2010.

Suggested Citation

  • MarioJ. Crucini & Mototsugu Shintani & Takayuki Tsuruga, 2010. "The Law of One Price without the Border: The Role of Distance versus Sticky Prices," Economic Journal, Royal Economic Society, vol. 120(544), pages 462-480, May.
  • Handle: RePEc:ecj:econjl:v:120:y:2010:i:544:p:462-480
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    More about this item

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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