DP7281 Estimating the Border Effect: Some New Evidence

Author(s):	Gita Gopinath, Pierre-Olivier Gourinchas, Chang-Tai Hsieh, Nicholas Li
Publication Date:	April 2009
Keyword(s):	barcode data, border effect, law of one price, market segmentation
JEL(s):	F40, F41
Programme Areas:	International Macroeconomics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=7281

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.