IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

The law of two prices: trade costs and relative price variability

Listed author(s):
  • Miklos Koren


    (PhD Candidate Economics, Harvard University (Cambridge))

The paper investigates whether deviations from the law of one price can attributed to real factors, such as transportation and distribution costs. Even if trade is costly, the prices of a good at di.erent locations will be linked as long as the good is traded. Instead of the usual iceberg assumption, I model costly trade as a transportation sector that uses real resources with potentially different factor intensities than the production of the good. First I use a latent factor model to see if distance specific ("transportation") and location specific ("retailing") factors can explain deviations from the law of one price across U.S. cities. For many products, these two factors explain 10-20% of all the variation in prices. The estimated transportation factor tends to move together with oil prices. Next I derive the variance of relative prices at di.erent locations when the price of transportation is determined in general equilibrium. This variance is high if (i) the good is costly to transport and (ii) it is produced with different factor intensities than transportation. Preliminary empirical results suggest that goods similar to transportation in terms of factor intensity have indeed lower relative price variability. As these goods tend to be costly to ship, this helps resolve the puzzling finding of Engel and Rogers (2001) that less tradable goods have less volatile relative prices.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: no

Paper provided by Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences in its series IEHAS Discussion Papers with number 0422.

in new window

Length: 32 pages
Date of creation: Dec 2004
Handle: RePEc:has:discpr:0422
Contact details of provider: Postal:
1112 Budapest, Budaorsi ut 45.

Phone: (+36-1) 309-2652
Fax: (36-1) 319-3136
Web page:

More information through EDIRC

No references listed on IDEAS
You can help add them by filling out this form.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:has:discpr:0422. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Adrienn Foldi)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.