Abstract
Relative cross-border retail prices, in a common currency, comove closely with the nominal exchange rate. Using product-level prices and wholesale costs from a grocery chain operating in the United States and Canada, we decompose this variation into relative costs and markup components. The high correlation of nominal and real exchange rates is driven mainly by changes in relative costs. National borders segment markets. Retail prices respond to changes in costs in neighboring stores within the same country but not across the border. Prices have a median discontinuous change of 24 percent at the border and 0 percent at state boundaries. (JEL F31, L11, L81)
Highlights
A well established fact in international economics is that relative prices at the retail level across countries, expressed in a common currency, co-moves closely with the nominal exchange rate
Understanding why is central to answering some of the classic questions in international economics ranging from the gains from market integration to the transmission of shocks across borders
To the extent that before-tax prices are higher in Canada than in the United States, as we find for a majority of goods in our sample, this implies that the after-tax price gap between the two countries is larger than what we measure
Summary
A well established fact in international economics is that relative prices at the retail level across countries, expressed in a common currency, co-moves closely with the nominal exchange rate. We use weekly data at the barcode level on retail prices and wholesale costs for 250 U.S stores (in 19 states) and 75 Canadian stores (in 5 provinces) of a single retail chain between January 2004 and June 2007 on over 4000 products. At short horizons these wholesale costs are the relevant marginal costs for retailers We use this data to measure directly the extent to which cross border retail price differences arise because of wholesale level pricing to market or because of variations in retail mark-ups. Prices do not change in response to changes in wholesale costs of neighboring stores when the neighboring store is in a different country These findings suggest that domestic markets are likely to be integrated while international retail and wholesale markets are not.
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