DP13650 Hump-shaped cross-price effects and the extensive margin in cross-border shopping

Author(s): Frode Steen
Publication Date: April 2019
Date Revised: April 2019
Keyword(s): competition in grocery markets, Cross-border shopping, product differentiation
JEL(s): F15, H73, L66, R20
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13650

This paper examines the effect of cross-border shopping on grocery demand in Norway using monthly store*category sales data from Norway's largest grocery chain 2011-2016. The sensitivity of demand to foreign price is hump-shaped and greatest 30-60 minutes' driving distance from the closest foreign store. Combining continuous demand, fixed costs of cross-border shopping and linear transport costs `a la Hotelling we show how this hump-shape can arise through a combination of intensive and extensive margins of cross-border shopping. Our conclusions are further supported by novel survey evidence and cross-border traffic data.