Pricing-to-Market and the Failure of Absolute PPP
49 Pages Posted: 28 Nov 2007
Date Written: September 2007
The authors show that deviations from the law of one price in tradable goods are an important source of violations of absolute PPP across countries. Using highly disaggregated export data, they document systematic international price discrimination: at the U.S. dock, U.S. exporters ship the same good to low-income countries at lower prices. This pricing-to-market is about twice as important as any local non-traded inputs, such as distribution costs, in explaining the differences in tradable prices across countries. The authors propose a model of consumer search that generates pricing-to-market. In this model, consumers in low-income countries have a comparative advantage in producing non-traded, non-market search activities and therefore are more price sensitive than consumers in high-income countries. They present cross-country time use evidence and evidence from U.S. export prices that are consistent with the model.
Keywords: PPP, Pricing-to-Market, Law of One Price
JEL Classification: E31, F12
Suggested Citation: Suggested Citation