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Price Dispersion and the Border Effect

Author

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  • Ryan Chahrour

    (Boston College)

  • Luminita Stevens

    (University of Maryland)

Abstract

We find that observed cross-country price differences primarily reflect regional market segmentation occurring within countries. Using a model of price setting subject to costly search, we show that identification of national versus regional segmentation requires augmenting price data with regional trade flow data. Calibrating the model to data from U.S. and Canadian regions, we estimate substantial regional trade frictions: U.S. producers are three times more likely to sell to retailers in their own region than in the “away” region of the United States, and only slightly less likely to sell to a region in Canada, controlling for market size differences. Canadian producers have an even stronger home bias: they are seven times more likely to sell in their own region than in the “away” region in Canada, and 11 times more likely to sell in their own region than in a U.S. region. Models that do not explicitly account for regional home bias can misstate the severity of segmentation at the national border.

Suggested Citation

  • Ryan Chahrour & Luminita Stevens, 2019. "Price Dispersion and the Border Effect," 2019 Meeting Papers 947, Society for Economic Dynamics.
  • Handle: RePEc:red:sed019:947
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    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F30 - International Economics - - International Finance - - - General
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)

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