Price Dispersion and the Border Effect

Ryan Chahrour and Luminita Stevens

No 947, 2019 Meeting Papers from Society for Economic Dynamics

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.

Date: 2019
New Economics Papers: this item is included in nep-int, nep-opm and nep-ure
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Journal Article: Price dispersion and the border effect (2020)
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