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Estimating the Border Effect: Some New Evidence

  • Gopinath, Gita
  • Gourinchas, Pierre-Olivier
  • Hsieh, Chang-Tai
  • Li, Nicholas

To what extent do national borders and national currencies impose costs that segment markets across countries? To answer this question we use a dataset with product level retail prices and wholesale costs for a large grocery chain with stores in the U.S. and Canada. We develop a model of pricing by location and employ a regression discontinuity approach to estimate and interpret the border effect. We report three main facts: 1) The median absolute retail price and whole-sale cost discontinuity between adjacent stores on either side of the U.S.-Canada border is as high as 21%. In contrast, within-country border discontinuity is close to 0%; 2) The variation in the retail price gap at the border is almost entirely driven by variation in wholesale costs, not by variation in markups; 3) The border gap in prices and costs co-move almost one to one with changes in the U.S.-Canada nominal exchange rate. We show these facts suggest that the price gaps we estimate provide only a lower bound on border costs.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7281.

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Date of creation: Apr 2009
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Handle: RePEc:cpr:ceprdp:7281
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  1. Christian Broda & David E. Weinstein, 2008. "Understanding International Price Differences Using Barcode Data," NBER Working Papers 14017, National Bureau of Economic Research, Inc.
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