Price dispersion and the border effect

Cross-country price differences could reflect regional market segmentation within countries or national segmentation at the border. In a search-based model of price setting, identifying national versus regional segmentation requires data on regional trade flows. A calibration to U.S. and Canadian data implies predominantly regional frictions: U.S. producers are three times more likely to sell in their home region than another U.S. region and Canadian producers are seven times more likely to sell in their home region than another Canadian region. Frictions vis-a-vis foreign regions are only slightly higher. Models that ignore regional segmentation can misstate the severity of frictions at the border.