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Virtual Borders: Online Nominal Rigidities and International Market Segmentation

  • Jean Boivin
  • Robert Clark
  • Nicolas Vincent

Do prices respond to macro shocks? Does the mere presence of international frontiers hinder trade? We revisit these questions by studying a dataset of online book prices for a number of US and Canadian retailers. We believe our dataset is well suited to this task for a number of reasons: (1) data for multiple retailers are available; (2) the products sold are identical across retailers; (3) the sample spans a period of large fluctuations in the bilateral exchange rate; (4) the nature of the industry is such that physical distance is irrelevant beyond shipping costs which are observable; (5) nominal frictions in the form of menu costs are arguably minimal; and (6) proxies for sales are available for most retailers. Given the unique nature of our dataset, the first objective of the paper is to document the degree of price rigidity and price dispersion. Our main findings are: online book prices display significant stickiness; there is a large degree of heterogeneity across retailers in terms of price rigidity and pricing strategy; price dispersion is high both within and across borders. Also, price levels do not appear to respond to exchange rate fluctuations. Building on the predictions from a simple two-country, multi-firm model and by exploiting information contained both in prices and quantities, we show that market segmentation is probably behind this disconnect .

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15642.

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Date of creation: Jan 2010
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Handle: RePEc:nbr:nberwo:15642
Note: EFG IFM ME
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  8. Gita Gopinath & Pierre-Olivier Gourinchas & Chang-Tai Hsieh & Nicholas Li, 2009. "Estimating the border effect: some new evidence," Working Papers 09-10, Federal Reserve Bank of Boston.
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  15. Jeffrey Campbell, 2000. "Real Exchange Rate Fluctuations and the Dynamics of Retail Trade Industries on the U.S.-Canada Border," Econometric Society World Congress 2000 Contributed Papers 1224, Econometric Society.
  16. N. Gregory Mankiw & Ricardo Reis, 2001. "Sticky Information Versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," NBER Working Papers 8290, National Bureau of Economic Research, Inc.
  17. Anindya Ghose & Bin Gu, 2006. "Search Costs, Demand Structure and Long Tail in Electronic Markets: Theory and Evidence," Working Papers 06-19, NET Institute, revised Oct 2006.
  18. Yuriy Gorodnichenko & Linda L. Tesar, 2009. "Border Effect or Country Effect? Seattle May Not Be So Far from Vancouver After All," American Economic Journal: Macroeconomics, American Economic Association, vol. 1(1), pages 219-41, January.
  19. Glenn Ellison & Sara Fisher Ellison, 2004. "Search, Obfuscation, and Price Elasticities on the Internet," NBER Working Papers 10570, National Bureau of Economic Research, Inc.
  20. Clay, Karen, et al, 2002. "Retail Strategies on the Web: Price and Non-price Competition in the Online Book Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 50(3), pages 351-67, September.
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  22. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring.
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