Consumer Search, Price Dispersion, and International Relative Price Volatility

47 Pages Posted: 28 Jul 2005

See all articles by George Alessandria

George Alessandria

Federal Reserve Bank of Philadelphia

Date Written: May 2005

Abstract

This paper develops a model of consumer search consistent with the evidence of substantial price dispersion within countries. This model is used to study international relative price fluctuations. Consumer search frictions permit firms to price discriminate across markets based on the local wage of consumers. With price dispersion, the market price of a good does not measure its resource cost. This breaks the tight link between relative quantities and relative prices implied by most models. The authors show that volatile and persistent fluctuations in relative wages lead to volatile and persistent fluctuations in relative prices at the disaggregate level. These deviations from the law of one price substantially increase international relative price volatility. With productivity and taste shocks, the model generates international business cycles that closely match the data.

Keywords: Real exchange rate, Pricing-to-market, Law of one price, Price dispersion, Consumer search

JEL Classification: E31, F12

Suggested Citation

Alessandria, George A., Consumer Search, Price Dispersion, and International Relative Price Volatility (May 2005). FRB Philadelphia Working Paper No. 05-9. Available at SSRN: https://ssrn.com/abstract=748384 or http://dx.doi.org/10.2139/ssrn.748384

George A. Alessandria (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

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

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