Report

Equilibrium Price Dispersion and the Border Effect


Abstract: We develop a model of equilibrium price dispersion via retailer search and show that the degree of market segmentation within and across countries cannot be separately identified by good-level price data alone. We augment a set of well-known empirical facts about the failure of the law of one price with data on aggregate intranational and international trade quantities, and calibrate the model to match price and quantity facts simultaneously. The calibrated model matches the data very well and implies that within-country markets are strongly segmented, while international borders contribute virtually no additional market segmentation.

Keywords: Border effect; Real exchange rate; Law of one price;

JEL Classification: E30; F30; F41;

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Provider: Federal Reserve Bank of Minneapolis

Part of Series: Staff Report

Publication Date: 2015-12-18

Number: 522

Pages: 46 pages