Working Paper: NBER ID: w14938
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: border effect; market segmentation; international economics; price differences
JEL Codes: F3; F4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| crossing the border (F55) | experiencing significant price differences (P22) |
| variation in wholesale costs (L11) | variation in the retail price gap (F61) |
| US-Canada nominal exchange rate fluctuations (F31) | median retail price and wholesale cost discontinuities (D49) |
| border costs (F55) | observed price gaps (D41) |