Estimating the Border Effect: Some New Evidence
Harvard University - Department of Economics; National Bureau of Economic Research (NBER)
University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)
University of Chicago - Booth School of Business; University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER)
University of Toronto - Department of Economics
September 14, 2009
Federal Reserve Bank of Boston Working Paper No. 09-10
To what extent do national borders and national currencies impose costs that segment markets across countries? To answer this question the authors use a dataset with product-level retail prices and wholesale costs for a large grocery chain with stores in the United States and Canada. They develop a model of pricing by location and employ a regression discontinuity approach to estimate and interpret the border effect. They report three main facts: One, the median absolute retail price and wholesale cost discontinuities between adjacent stores on either side of the U.S.-Canadian border are as high as 21 percent. In contrast, within-country border discontinuity is close to 0 percent. Two, the variation in the retail price gap at the border is almost entirely driven by variation in wholesale costs, not by variation in markups. Three, the border gaps in prices and costs co-move almost one-to-one with changes in the U.S.-Canadian nominal exchange rate. They show these facts suggest that the price gaps they estimate provide only a lower bound on border costs.
Number of Pages in PDF File: 52
JEL Classification: F3, F4, F1
Date posted: September 19, 2009
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