Pricing-to-Market and the Failure of Absolute PPP

49 Pages Posted: 28 Nov 2007

See all articles by George Alessandria

George Alessandria

Federal Reserve Bank of Philadelphia

Joseph P. Kaboski

Ohio State University (OSU) - Economics; National Bureau of Economic Research (NBER); University of Notre Dame - Department of Economics

Date Written: September 2007

Abstract

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

Alessandria, George A. and Kaboski, Joseph P., Pricing-to-Market and the Failure of Absolute PPP (September 2007). FRB of Philadelphia Working Paper No. 07-29. Available at SSRN: https://ssrn.com/abstract=1031516 or http://dx.doi.org/10.2139/ssrn.1031516

George A. Alessandria (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
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(215) 574-6402 (Phone)
(215) 574-4364 (Fax)

Joseph P. Kaboski

Ohio State University (OSU) - Economics ( email )

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Columbus, OH 43210-1172
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
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University of Notre Dame - Department of Economics ( email )

Notre Dame, IN 46556
United States

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