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Equilibrium Price Dispersion and the Border Effect

Luminita Stevens and Ryan Chahrour

No 522, Staff Report from Federal Reserve Bank of Minneapolis

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: Law of one price; Border effect; Real exchange rate (search for similar items in EconPapers)
JEL-codes: E30 F30 F41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com, nep-dge, nep-mac and nep-opm
Date: 2015-12-18
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