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Understanding Long-run Price Dispersion

Author

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  • Mario J. Crucini
  • Hakan Yilmazkuday

Abstract

We use a unique panel of retail prices spanning 123 cities in 79 countries from 1990 to 2005, to uncover six novel properties of long-run international price dispersion. First, at the PPP level, virtually all (91.6%) of price dispersion is attributed to service-sector wages, consistent with a dominant role of the retail distribution margin. Second, at the level of individual goods and services, the average contribution of service-sector wages is significantly reduced, one-third as large (31.9%). This reflects the fact that good-specific sources of price dispersion, such as trade costs and good-specific markups, tend to average out across goods. Third, at the LOP level, borders and distance contribute about equally to price dispersion with distance elasticities consistent with the existing trade gravity literature which links trade volumes (rather than relative prices) to borders and distance. Fourth, in the cross-section, price dispersion is rising in the distribution share consistent with the notion that baby-sitting services and haircuts embody local wages to a far greater extent than highly traded manufactured goods. Fifth, we provide the first estimates of distribution margins at the micro-level and show them to be very different across goods and substantial in the aggregate, where they account for about 55% of consumption expenditure. Sixth, these estimates are broadly consistent with more aggregated U.S. NIPA measures currently used in the literature.

Suggested Citation

  • Mario J. Crucini & Hakan Yilmazkuday, 2013. "Understanding Long-run Price Dispersion," NBER Working Papers 18811, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:18811
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    References listed on IDEAS

    as
    1. Anthony Landry & Mario Crucini, 2010. "Accounting for Real Exchange Rates using Micro-Data," 2010 Meeting Papers 1100, Society for Economic Dynamics.
    2. George Alessandria, 2004. "International Deviations From The Law Of One Price: The Role Of Search Frictions And Market Share," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(4), pages 1263-1291, November.
    3. Ariel Burstein & Martin Eichenbaum & Sergio Rebelo, 2005. "Large Devaluations and the Real Exchange Rate," Journal of Political Economy, University of Chicago Press, vol. 113(4), pages 742-784, August.
    4. Engel, Charles & Rogers, John H, 1996. "How Wide Is the Border?," American Economic Review, American Economic Association, vol. 86(5), pages 1112-1125, December.
    5. Berthold Herrendorf & Akos Valentinyi, 2005. "Which Sectors Make the Poor Countries so Unproductive?," IEHAS Discussion Papers 0519, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
    6. Mario J. Crucini & Chris I. Telmer & Marios Zachariadis, 2005. "Understanding European Real Exchange Rates," American Economic Review, American Economic Association, vol. 95(3), pages 724-738, June.
    7. Mario J. Crucini & Hakan Yilmazkuday, 2009. "A Model of International Cities: Implications for Real Exchange Rates," NBER Working Papers 14834, National Bureau of Economic Research, Inc.
    8. Burstein, Ariel & Eichenbaum, Martin & Rebelo, Sergio, 2007. "Modeling exchange rate passthrough after large devaluations," Journal of Monetary Economics, Elsevier, vol. 54(2), pages 346-368, March.
    9. Burstein, Ariel T. & Neves, Joao C. & Rebelo, Sergio, 2003. "Distribution costs and real exchange rate dynamics during exchange-rate-based stabilizations," Journal of Monetary Economics, Elsevier, vol. 50(6), pages 1189-1214, September.
    10. Bela Balassa, 1964. "The Purchasing-Power Parity Doctrine: A Reappraisal," Journal of Political Economy, University of Chicago Press, vol. 72, pages 584-584.
    11. George Alessandria & Joseph P. Kaboski, 2011. "Pricing-to-Market and the Failure of Absolute PPP," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(1), pages 91-127, January.
    12. Sanyal, Kalyan K & Jones, Ronald W, 1982. "The Theory of Trade in Middle Products," American Economic Review, American Economic Association, vol. 72(1), pages 16-31, March.
    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. Peter Kennedy, 2003. "A Guide to Econometrics, 5th Edition," MIT Press Books, The MIT Press, edition 5, volume 1, number 026261183x, May.
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Understanding Long-run Price Dispersion
      by Hakan Yilmazkuday in Hakan Yilmazkuday's Blog on 2016-12-21 04:56:00

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    Cited by:

    1. Nakamura,Shohei & Harati,Rawaa & Lall,Somik V. & Dikhanov,Yuri M. & Hamadeh,Nada & Vigil Oliver,William & Rissanen,Marko Olavi & Yamanaka,Mizuki, 2016. "Is living in African cities expensive ?," Policy Research Working Paper Series 7641, The World Bank.
    2. Anthony Landry & Mario Crucini, 2010. "Accounting for Real Exchange Rates using Micro-Data," 2010 Meeting Papers 1100, Society for Economic Dynamics.
    3. Simonovska, Ina & Waugh, Michael E., 2014. "The elasticity of trade: Estimates and evidence," Journal of International Economics, Elsevier, vol. 92(1), pages 34-50.
    4. Demet Yilmazkuday & Hakan Yilmazkuday, 2017. "The role of direct flights in trade costs," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 153(2), pages 249-270, May.
    5. Martin Ravallion, 2014. "An Exploration of the International Comparison Program's New Global Economic Landscape," NBER Working Papers 20338, National Bureau of Economic Research, Inc.
    6. Mario Crucini & Anthony Landry & Craig Benedict, 2014. "On what states do prices depend? Answers from Ecuador," 2014 Meeting Papers 722, Society for Economic Dynamics.
    7. Michael Waugh & Ina Simonovska, 2012. "Different Trade Models, Different Trade Elasticities?," 2012 Meeting Papers 618, Society for Economic Dynamics.
    8. Dvir, Eyal & Strasser, Georg, 2018. "Does marketing widen borders? Cross-country price dispersion in the European car market," Journal of International Economics, Elsevier, vol. 112(C), pages 134-149.
    9. Anderson Michael A. & Schaefer Kurt C. & Smith Stephen L. S., 2013. "Can Price Dispersion Reveal Distance-Related Trade Costs? Evidence from the United States," Global Economy Journal, De Gruyter, vol. 13(2), pages 151-173, June.
    10. Alok Johri & Terry Yip, 2015. "Financial Shocks, Customer Capital and the Trade Collapse of 2008-2009," Department of Economics Working Papers 2015-13, McMaster University, revised Sep 2015.
    11. repec:kap:jincot:v:17:y:2017:i:4:d:10.1007_s10842-017-0246-3 is not listed on IDEAS
    12. M. A. Anderson & M. H. Davies & S. L. S. Smith, 2016. "Ethnic Networks and Price Dispersion," Review of International Economics, Wiley Blackwell, vol. 24(3), pages 514-535, August.
    13. Dmitry Kulikov, 2015. "Law of One Price in the euro area: an empirical investigation using Nielsen disaggregated price data," Bank of Estonia Working Papers wp2014-10, Bank of Estonia, revised 20 Jan 2015.
    14. Kenneth Gillingham, Hao Deng, Ryan Wiser, Naim Darghouth, Gregory Nemet, Galen Barbose, Varun Rai, and Changgui Dong, 2016. "Deconstructing Solar Photovoltaic Pricing," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3).
    15. Neil Balchin & Lawrence Edwards & Asha Sundaram, 2015. "A Disaggregated Analysis of Product Price Integration in the Southern African Development Community," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 24(3), pages 390-415.
    16. repec:eee:inecon:v:106:y:2017:i:c:p:55-82 is not listed on IDEAS
    17. Flavio Delbono & Gemma Dipoppa & Luca Lambertini & Carlo Reggiani, 2017. "A Single Espresso, Please! Rationalizing Espresso Price Dispersion Across Italian Cities," Journal of Industry, Competition and Trade, Springer, vol. 17(4), pages 465-478, December.
    18. Liu, Yue, 2016. "Price dispersion across countries and the heterogeneous impacts of income differences," Economics Letters, Elsevier, vol. 140(C), pages 64-67.
    19. Crucini, Mario J. & Davis, J. Scott, 2016. "Distribution capital and the short- and long-run import demand elasticity," Journal of International Economics, Elsevier, vol. 100(C), pages 203-219.
    20. Robertson, Raymond & Kumar, Anil & Dutkowsky, Donald H., 2014. "Weak-form and strong-form purchasing power parity between the US and Mexico: A panel cointegration investigation," Journal of Macroeconomics, Elsevier, vol. 42(C), pages 241-262.
    21. Yilmazkuday, Hakan, 2016. "Constant versus variable markups: Implications for the law of one price," International Review of Economics & Finance, Elsevier, vol. 44(C), pages 154-168.
    22. Kurokawa, Yoshinori & Pang, Jiaren & Tang, Yao, 2016. "Exchange rate regimes and wage comovements in a Ricardian model with money," Journal of International Economics, Elsevier, vol. 102(C), pages 96-109.
    23. Alok Johri & Terry Yip, 2017. "Financial Shocks,Supply-chain Relationships and the Great Trade Collapse," Department of Economics Working Papers 2017-11, McMaster University.
    24. repec:eee:ecmode:v:69:y:2018:i:c:p:49-57 is not listed on IDEAS

    More about this item

    JEL classification:

    • F0 - International Economics - - General
    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F15 - International Economics - - Trade - - - Economic Integration
    • F63 - International Economics - - Economic Impacts of Globalization - - - Economic Development

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