Working Paper: CEPR ID: DP7281
Authors: Gita Gopinath; Pierre-Olivier Gourinchas; Changtai Hsieh; Nicholas Li
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.
Keywords: barcode data; border effect; law of one price; market segmentation
JEL Codes: F40; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| border segmentation (F55) | price gaps (F12) |
| US-Canada nominal exchange rate (N12) | border effect on prices (F16) |
| US-Canada nominal exchange rate (N12) | border effect on costs (F55) |