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Local Costs of Distribution, International Trade Costs and Micro Evidence on the Law of One Price

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  • Rahul Giri

    (Centro de Investigacion Economica (CIE), Instituto Tecnologico Autonomo de Mexico (ITAM))

Abstract

Using retail price survey data, I investigate whether international goods' market segmentation implied by dispersion in goods' prices is consistent with market segmentation implied by observed trade flows. A Ricardian trade model, with heterogeneous and asymmetric bilateral trade costs, accounts for 85 percent of the average price dispersion and 21 percent of the across good variation in it. Adding good-specific distribution costs reproduces 96.5 percent of the average and 32 percent of the variation in price dispersion. Allowing for good-specific trade costs enables the model to match the average perfectly and explain 48 percent of the variation. While trade and distribution costs explain price dispersion of an average retail good, they account for only half of the across good variation.

Suggested Citation

  • Rahul Giri, 2010. "Local Costs of Distribution, International Trade Costs and Micro Evidence on the Law of One Price," Working Papers 1001, Centro de Investigacion Economica, ITAM.
  • Handle: RePEc:cie:wpaper:1001
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    2. Sun, Puyang & Hou, Xinyu & Tan, Yong, 2017. "Export Rivalry and Exchange Rate Pass-Through," MPRA Paper 83369, University Library of Munich, Germany.
    3. Jorgensen, Christian & Persson, Morten, 2013. "The Market for Tractors in the EU: Price Differences and Convergence," Working papers 144005, Factor Markets, Centre for European Policy Studies.
    4. Giri, Rahul & Yi, Kei-Mu & Yilmazkuday, Hakan, 2021. "Gains from trade: Does sectoral heterogeneity matter?," Journal of International Economics, Elsevier, vol. 129(C).
    5. Hu, Cui & Parsley, David & Tan, Yong, 2021. "Exchange rate induced export quality upgrading: A firm-level perspective," Economic Modelling, Elsevier, vol. 98(C), pages 336-348.
    6. Hayakawa, Kazunobu & Tsubota, Kenmei, 2022. "The impact of highways on commodity prices: The price of butter in Japan," Journal of Asian Economics, Elsevier, vol. 81(C).
    7. Caroline Betts & Rahul Giri & Rubina Verma, 2017. "Trade, Reform, and Structural Transformation in South Korea," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 65(4), pages 745-791, November.
    8. Hakan Yilmazkuday, 2021. "Drivers of Global Trade: A Product-Level Investigation," International Economic Journal, Taylor & Francis Journals, vol. 35(4), pages 469-485, October.
    9. Tan, Yong & Zhao, Chen, 2017. "New Exporters and Continuing Exporters under Exchange Rate Fluctuations," MPRA Paper 77244, University Library of Munich, Germany.
    10. Kyle Olsen & James Mjelde & David Bessler, 2015. "Price formulation and the law of one price in internationally linked markets: an examination of the natural gas markets in the USA and Canada," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 54(1), pages 117-142, January.
    11. Choi, Chi-Young & Choi, Horag, 2014. "Does distance reflect more than transport costs?," Economics Letters, Elsevier, vol. 125(1), pages 82-86.
    12. Yong Tan & Chen Carol Zhao, 2020. "Firms’ heterogeneity, demand accumulating, and exchange rate pass‐through," Southern Economic Journal, John Wiley & Sons, vol. 87(2), pages 700-731, October.
    13. Mario J. Crucini & Christopher I. Telmer, 2012. "Microeconomic Sources of Real Exchange Rate Variability," NBER Working Papers 17978, National Bureau of Economic Research, Inc.
    14. Sposi, Michael, 2015. "Trade barriers and the relative price of tradables," Journal of International Economics, Elsevier, vol. 96(2), pages 398-411.
    15. 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.
    16. Dongmei Guo & Die Hu & Weizeng Sun, 2023. "Effect of goods market segmentation on labor mobility: Evidence from China," Review of Development Economics, Wiley Blackwell, vol. 27(1), pages 423-449, February.
    17. Xuebing Yang, 2015. "Estimating Distribution Costs with the Eaton–Kortum Model," Review of Development Economics, Wiley Blackwell, vol. 19(3), pages 653-665, August.
    18. Kazunobu Hayakawa & Ikumo Isono & Satoru Kumagai, 2020. "Transportation Costs in Archipelagos: Evidence from Indonesia," The Developing Economies, Institute of Developing Economies, vol. 58(3), pages 227-241, September.
    19. Betts, Caroline & Giri, Rahul & Verma, Rubina, 2017. "Trade, Reform and Structural Change in South Korea," MPRA Paper 79072, University Library of Munich, Germany.

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    More about this item

    Keywords

    Trade; International trade costs; distribution costs; law of one price; price dispersion;
    All these keywords.

    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F15 - International Economics - - Trade - - - Economic Integration

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