"The Bigger They Are, The Harder They Fall": How Price Differences Across U.S. Cities Are Arbitraged

Paul G. J. O'Connell and Shang-Jin Wei

No 6089, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Recent empirical work has made headway in exploring the non-linear dynamics of deviations from the law of one price and" purchasing power parity that are apt to arise from transaction costs. However, there are two important facets of this work that need improvement. First, the choice of empirical specification is arbitrary. Second, the data used are typically composite price indices which are subject to potentially serious aggregation biases. This paper examines the evidence for transport-cost-induced nonlinear price behavior within the U.S. We address both of the above shortcomings. First, we use a simple continuous-time model to inform the choice of empirical specification. The model indicates that the behavior of deviations from price parity depends on the relative importance of fixed and variable transport costs. Second, we employ data on disaggregated commodity prices, yielding a pure' measure of the deviations from price parity. We find strong evidence of nonlinear reversion in these deviations. The nature of this reversion suggests that fixed costs of transportation are integral to an understanding of law-of-one-price deviations.

JEL-codes: C32 F31 (search for similar items in EconPapers)
Date: 1997-07
Note: IFM ITI
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (77)

Published as O'Connell, Paul G. J. and Shang-Jin Wei. "'The Bigger They Are, The Harder They Fall': Retail Price Differences Across U.S. Cities," Journal of International Economics, 2002, v56(1,Jan), 21-53.

Downloads: (external link)
http://www.nber.org/papers/w6089.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:6089

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w6089

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().