Equilibrium Price Dispersion and the Border Effect

Luminita Stevens, Research Economist & 2015/16 Junior Scholar

December 2015 | Federal Reserve Bank of Minneapolis Staff Report 522 | With Ryan Chahrour

We develop a model of equilibrium price dispersion via retailer search and show that the degree of market segmentation within and across countries cannot be separately identified by good-level price data alone. We augment a set of well-known empirical facts about the failure of the law of one price with data on aggregate intranational and international trade quantities, and calibrate the model to match price and quantity facts simultaneously. The calibrated model matches the data very well and implies that within-country markets are strongly segmented, while international borders contribute virtually no additional market segmentation.