Working Paper: NBER ID: w20406
Authors: Yuriy Gorodnichenko; Oleksandr Talavera
Abstract: We document basic facts about prices in online markets in the U.S. and Canada, a rapidly growing segment of the retail sector. Relative to prices in regular stores, prices in online markets are more flexible as well as exhibit stronger pass-through (60-75 percent) and faster convergence (half-life less than 2 months) in response to movements of the nominal exchange rate. Multiple margins of adjustment (frequency of price changes, direction of price changes, size of price changes, exit of sellers) are active in the process of responding to nominal exchange rate shocks. Furthermore, we use the richness of our dataset to show that degree of competition, stickiness of prices, synchronization of price changes, reputation of sellers, and returns to search effort are important determinants of pass-through and speed of price adjustment for international price differentials.
Keywords: price setting; online markets; international comparisons; cross-border integration
JEL Codes: E3; F4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Nominal exchange rate fluctuations (F31) | Price adjustments in online markets (D40) |
| Online prices are more flexible compared to regular store prices (P22) | Size of price changes in online markets is approximately 4% (D41) |
| Size of price changes in online markets is approximately 4% (D41) | Size of price changes in regular stores is around 10% (E30) |
| Price changes occur more frequently in online stores (L81) | Price changes occur approximately once every three weeks (D41) |
| Price changes occur approximately once every three weeks (D41) | Price changes occur once every 45 months in regular stores (E30) |
| Passthrough in online markets is incomplete yet substantial (D52) | Average passthrough is between 60-75% (H43) |
| Average passthrough is between 60-75% (H43) | Passthrough in regular markets is typically 20-40% (G19) |
| Speed of price adjustment is faster in online markets (D40) | Halflife of about 2.25 months (C41) |
| Speed of price adjustment is faster in online markets (D40) | Longer durations in regular markets (C41) |
| Degree of competition (L13) | Passthrough and speed of price adjustment (D40) |
| Price stickiness (E31) | Passthrough and speed of price adjustment (D40) |
| Synchronization of price changes (P22) | Passthrough and speed of price adjustment (D40) |
| Reputation of sellers (L14) | Passthrough and speed of price adjustment (D40) |
| Returns to search effort (I26) | Passthrough and speed of price adjustment (D40) |