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Estimating the Border Effect: Some New Evidence

Gita Gopinath, Pierre-Olivier Gourinchas (), Chang-Tai Hsieh and Nicholas Li ()

No 14938, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: To what extent do national borders and national currencies impose costs that segment markets across countries? To answer this question we use a dataset with product level retail prices and wholesale costs for a large grocery chain with stores in the U.S. and Canada. We develop a model of pricing by location and employ a regression discontinuity approach to estimate and interpret the border effect. We report three main facts: 1) The median absolute retail price and whole-sale cost discontinuity between adjacent stores on either side of the U.S.-Canada border is as high as 21%. In contrast, within-country border discontinuity is close to 0%; 2) The variation in the retail price gap at the border is almost entirely driven by variation in wholesale costs, not by variation in markups; 3) The border gap in prices and costs co-move almost one to one with changes in the U.S.-Canada nominal exchange rate. We show these facts suggest that the price gaps we estimate provide only a lower bound on border costs.

JEL-codes: F3 F4 (search for similar items in EconPapers)
Date: 2009-04
New Economics Papers: this item is included in nep-cba and nep-ifn
Note: EFG IFM ME
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Published as International Prices, Cost and Markup Differences (American Economic Review, 101(6), pp.2450-86, October 2011), available from American Economic Association

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