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Segmentation of consumer markets in the US: What do intercity price differences tell us?

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  • Chi‐Young Choi
  • Anthony Murphy
  • Jyh‐Lin Wu

Abstract

We quantify the magnitude of market segmentation in US consumer market and explore the underlying factors behind this segmentation, using a quarterly panel of retail prices for 45 products in 48 US cities from 1985 to 2009. The extent of market segmentation is estimated using city‐pair price differences within the framework of both linear autoregressive (AR) and nonlinear threshold autoregressive (TAR) models. We find that the magnitude of market segmentation varies from one product to another, but even more across city pairs in each product. Contrary to a widespread perception, market segmentation within the US is not necessarily larger for non‐tradable services compared to tradable goods. We identify potential drivers of market segmentation by relating the cross‐city and cross‐product variations of market segmentation to location‐specific and product‐specific characteristics—distance, relative city sizes, differences in wage and rent, type of product and proximity to marketplace. Distance, which captures more than transport costs, turns out to be the most salient factor even after controlling for a range of other potential factors. The effect of distance, however, varies substantially across products, with perishable products and locally produced products showing larger distance effect on market segmentation. We find that the magnitude of market segmentation has been somewhat stable during the sample period, but intercity price differences have become more sensitive to distance over time in many products under study. Segmentation des marchés à la consommation aux États‐Unis : qu'est‐ce que les différences de prix entre villes nous disent? Les auteurs quantifient la magnitude de la segmentation des marchés à la consommation aux États‐Unis et explorent les facteurs sous‐jacents à cette segmentation à l'aide d'un panel de prix au détail pour 45 produits dans 48 villes américaines entre 1985 et 2009. On mesure la magnitude de la segmentation des marchés en utilisant les différences de prix entre paires de villes dans le cadre de modèles à la fois linéaires et autorégressifs, et de modèles non‐linéaires et autorégressifs avec seuils. On découvre que la magnitude de la segmentation varie d'un produit à l'autre, et encore davantage entre paires de villes pour chaque produit. Contrairement à une impression largement répandue, la segmentation n'est pas nécessairement plus grande pour les biens non échangés internationalement que pour ceux qui le sont. On identifie les facteurs déterminants dans ce processus de segmentation en co‐reliant les variations dans la segmentation entre villes et entre produits avec des caractéristiques particulières de produits et de localisations – distance, tailles relatives des villes, différences des niveaux de salaires et de loyers, types de produits, et proximité du marché. Le facteur distance (qui a une force d'explication plus grande que les coûts de transport) s'avère le facteur le plus déterminant même après normalisation pour tenir compte d'un éventail d'autres facteurs potentiels. Les effets de distance, cependant, varient substantiellement selon les produits ‐ les produits périssables et produits localement ayant un plus grand effet de distance dans la segmentation. On découvre aussi que la magnitude de la segmentation des marchés a été plus ou moins stable au cours de la période étudiée, mais que les différences de prix entre villes sont devenues davantage sensibles avec le temps au facteur distance pour plusieurs produits étudiés.

Suggested Citation

  • Chi‐Young Choi & Anthony Murphy & Jyh‐Lin Wu, 2017. "Segmentation of consumer markets in the US: What do intercity price differences tell us?," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 50(3), pages 738-777, August.
  • Handle: RePEc:wly:canjec:v:50:y:2017:i:3:p:738-777
    DOI: 10.1111/caje.12277
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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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