INTERNATIONAL DEVIATIONS FROM THE LAW OF ONE PRICE: THE ROLE OF SEARCH FRICTIONS AND MARKET SHARE*

This article examines the size and persistence of international deviations from the law of one price in an industry with search frictions. Cost differences lead foreign and domestic firms to price differently within countries. When local firms are more common in each country, there are large and persistent price differences across countries. Large and persistent changes in international relative costs lead to large and persistent changes in international relative prices. Dynamic considerations imply that the amount of a cost shock firms pass through to prices is U‐shaped in the market share of firms receiving the shock.     

The effect of distance and road quality on food collection, marketing margins, and traders' wages: evidence from the former Zaire

Food price variation is typical of the food economies of many low income countries. The presence or absence of road infrastructure is perceived to be one of the main determinants of this variation. This analysis shows that in the case of the former Zaire, food price dispersion is significant both across products and across regions. It is demonstrated that transportation costs explain most of the differences in food prices between producer regions and that road quality is an important factor in the transportation costs. However, food prices decrease relatively faster than transportation costs increase and traders' wages are higher on bad roads.     

Food Prices and Market Structure in Sweden

This paper examines retail grocery price levels across a large panel of stores in Sweden. We explain price variation across stores by market structure variables to capture differences in competition intensity and a number of store– and region–specific factors. Most of the explained variation in prices can be attributed to store–specific factors such as size and chain affiliation. Overall, the relation between market structure variables and food prices is weak, and effects are small in percentage terms. Nevertheless, higher local concentration of stores, higher regional wholesaler concentration and a lower market share of large stores are all correlated with higher prices.
JEL classification : D 43; L 13; L 81     

Commitment and price competition in a dynamic differentiated-product duopoly

This paper characterizes linear Markov-perfect equilibrium in a duopolistic environment where firms engage in dynamic price competition. Firms have constant (but potentially different) marginal costs and produce differentiated products. We show that, for the case of linear demand, dynamically stable Markov-perfect equilibrium prices are strictly higher than one-shot Nash equilibrium prices, but lower than fully collusive (monopoly) prices. We provide closed-form solutions for the Markov-perfect equilibrium prices which, in principle, can be estimated given data on firm demand and costs. Our results suggest that static two-stage models of price commitment are on reasonably solid ground in that they might be viewed as a reduced form for more complicated dynamic models.     

Housing price variability: national and local impacts

This article examines the influence of national and local forces on housing prices in 20 local US real estate markets during the recent housing price run-up and decline. We use reduced-form panel data fixed-effects models with robust SEs to determine the impact of national and local effects on housing prices in 20 US cities across time. A national home price index and mortgage rate are used to measure national impacts on the local markets. A mix of socio-economic variables estimates local impacts. We find no results indicating that national trends lack relevance in local markets; however, we find wide support for the additional inclusion of local socio-economic factors in all markets. The findings are consistent with an environment in which national polices and trends influence all markets; however local policymakers and investors can continue to expect geographic differences in market outcomes.     

THE MEASUREMENT OF POVERTY WITH GEOGRAPHICAL AND INTERTEMPORAL PRICE DISPERSION: EVIDENCE FROM RWANDA

It is not known to what extent welfare measures result from seasonal and geographical price differences rather than from differences in living standards across households. Using data from Rwanda in 1983, we show that the change in mean living standard indicators caused by local and seasonal price deflation is moderately significant at every quarter. By contrast, the differences in poverty measures caused by this deflation can be considerable, for chronic as well as transient or seasonal poverty indicators. Thus, poverty monitoring and anti-poverty targeting can be badly affected by inaccurate deflation of living standard data. Moreover, when measuring seasonal poverty, the deflation based on regional prices instead of local prices only partially corrects for spatial price dispersion. Using annual local prices instead of quarterly local prices only yields a partial deflation, which distorts the measure of poverty fluctuations across seasons and biases estimates of annual and chronic poverty.     

Inflation dynamics in Kazakhstan1

In January 1992, Kazakhstan initiated a reform programme to move towards market-determined prices. The price liberalization process was characterized by large relative price shifts and an increase in the overall price level towards those observed in market economies. The paper shows how the piecemeal manner in which prices were liberalized resulted in strong relative price variability over a prolonged period of time, against a background of high inflation. Convergence towards international relative and absolute price levels has progressed but is not complete, with prices for energy and services in particular still below market economy levels.     

Trends in Disaggregated Import and Export Prices in Europe: Implications for the Trade and Wages Debate

We consider carefully the evidence from traded prices (as proxied by unit values) concerning the transmission of the effects of globalisation to domestic labour markets. Using standard index number techniques we decompose changes in sectoral import and export unit values into movements due to changes in pure prices of the initial bundle of goods imported or exported and changes due to upgrading of that bundle. Looking at the imports of selected European countries of textiles, clothing and footwear relative to engineering products we find evidence of strongly falling pure prices of the unskilled intensive products relative to the skilled products in the 1980s. This reinforces the view that import prices can capture the impact of globalisation in terms of falling relative prices for products produced with the intensive use of unskilled labour. However, the trends are not common across all the unskilled sectors; footwear is clearly an exception. In the absence of detailed domestic data, we look for reactions by domestic firms to increased import competition in movements in the price and composition of exports. We find evidence of stiff price competition from imports being associated with similar movements in export prices and no support for the view that import competition from low–wage countries has led to upgrading of the quality of exports.     

Differences in long run exchange rate pass-through into import prices in developing countries: An empirical investigation

This paper investigates the exchange rate pass-through into import prices in a sample of 24 developing countries over the period from 1980 to 2003. We estimate a pass-through equation determined by a combination of the nominal exchange rate, the price of the competing products, the exporter's costs and demand conditions. We adopt non-stationary panel estimation techniques and tests for cointegration. In the long run, homogeneity of pass-through rates across countries can be rejected. Moreover, we show that most of these differences in exchange rate pass-through into import prices are due to three macroeconomics determinants: exchange rate regimes, trade barriers and inflation regimes.     

Segmentation of consumer markets in the US: What do intercity price differences tell us?

We quantify the magnitude of market segmentation in US consumer market and explore the underlying factors behind this segmentation, using a quarterly panel of retail prices for 45 products in 48 US cities from 1985 to 2009. The extent of market segmentation is estimated using city‐pair price differences within the framework of both linear autoregressive (AR) and nonlinear threshold autoregressive (TAR) models. We find that the magnitude of market segmentation varies from one product to another, but even more across city pairs in each product. Contrary to a widespread perception, market segmentation within the US is not necessarily larger for non‐tradable services compared to tradable goods. We identify potential drivers of market segmentation by relating the cross‐city and cross‐product variations of market segmentation to location‐specific and product‐specific characteristics—distance, relative city sizes, differences in wage and rent, type of product and proximity to marketplace. Distance, which captures more than transport costs, turns out to be the most salient factor even after controlling for a range of other potential factors. The effect of distance, however, varies substantially across products, with perishable products and locally produced products showing larger distance effect on market segmentation. We find that the magnitude of market segmentation has been somewhat stable during the sample period, but intercity price differences have become more sensitive to distance over time in many products under study.     

PRICE SETTING PRACTICES IN GREECE: EVIDENCE FROM A SMALL‐SCALE FIRM‐LEVEL SURVEY

The paper documents the price setting practices followed by some 400 or so firms operating in Greece. Survey replies reveal a low percentage of firms changing prices with frequency higher than annual and staggering of price changes during the year. As to firms’ reactions to unexpected shocks, prices appear to adjust sluggishly to cost shocks with asymmetries in price adjustment across positive and negative shocks. Adjustments to increases in costs appear speedier than those to reductions in demand. The data confirm a result found for other countries: the existence of cross‐sectional variations in price setting strategies and in the extent to which prices are adjusted in reaction to unexpected shocks. The results suggest a positive association between, on the one hand, product market competition and, on the other hand, state‐dependent pricing, frequent price changes and the likelihood of a price adjustment following an adverse demand shock.     

Land price diffusion across borders – the case of Germany

ABSTRACT

Land market regulations are often justified by the assumption that activities of foreign and non-agricultural investors drive up prices in domestic land markets. However, empirical knowledge about the dynamics of agricultural land prices across borders is sparse. Using the German reunification as a natural experiment, we study the effect of the former inner German border on the dynamics of agricultural land prices in East and West Germany. We apply a land price diffusion model with an error correction specification to analyse spatial agricultural land markets. A novel feature of our model is its ability to distinguish price diffusion within states and across state borders. We provide evidence for a persistent border effect given that the fraction of spatially integrated counties is larger within states than across the former border. Moreover, we observe non-significant error correction terms for many counties along the former border. From a policy perspective, it is striking to realize that even 25 years after German reunification, pronounced land price differences persist. It is quite likely that price diffusion through existing borders within the EU would take even more time given language barriers, different institutional frameworks, and information asymmetries between domestic and foreign market participants.     

Who Faces Higher Prices? An Empirical Analysis Based on Japanese Homescan Data

On the basis of household‐level scanner data (called homescan data) for Japan, we construct a household‐level price index and investigate the causes of price differences across households. We observe large price differentials across households, a result that is consistent with the previous research based on the data in the USA. However, the differences across age and income groups are small. In addition, we find that elderly people face higher prices than the younger ones, which is contrary to the results of the previous research. The most important determinant of the price level is the extent to which households rely on bargain sales; doubling purchases of goods at bargain sales decreases the price level by about 2%, while shopping frequency only has a limited effect on the price level.     

CROSS‐MARKET TRADING IN CHINA'S LARGE STATE‐OWNED COMMERCIAL BANKS, 2006–2011

This paper examines the differential between the share prices of China's large state‐owned commercial banks traded in Shanghai versus prices observed in Hong Kong. We find a significant role for investor sentiment, as reflected in relative price‐earnings ratios, in explaining these price differentials for all four banks. The share price in Shanghai tends to move ahead of the share price in Hong Kong when more positive sentiment in Shanghai makes local investors willing to pay more for the same predicted earnings. We also identify common trends in relative bank price‐earnings ratios and price differentials across the two markets. (JEL G14, G15)     

Dynamic Model for Market Competition and Price Rigidity

This article presents a price floor model in which durability, unit costs and production period are factors in explaining price rigidity. This article elaborates that cost structure plays an essential role in resolving the inconclusive relationship between market concentration and price rigidity. When the industry is characterized by decreasing returns of scale, the degree of price flexibility decreases as market competition intensifies. The reverse is true when the industry exhibits increasing returns of scale. The factors that cause price rigidity also foster price adjustment asymmetry and price adjustment lag. During times of recession, the model exhibits upward price flexibility as costs increase, but downward price rigidity as costs decrease. Even under forward-looking expectations, the way in which firms adjust prices could look as though they have adaptive expectations. If price stickiness is a characteristic of market competition, then public policies determined by price level could be too drastic for firms in competitive markets.     

Micro Price Dynamics during Japan's Lost Decades

We study micro price dynamics and their macroeconomic implications using daily scanner data from 1988 to 2013. We provide five facts. First, posted prices in Japan are ten times as flexible as those in the US scanner data. Second, regular prices are almost as flexible as those in the USA and Euro area. Third, the heterogeneity of frequency and size of price change across products is sizable and maintained throughout the sample period. Fourth, during Japan's lost decades, temporary sales have played an increasingly important role in households' consumption expenditure. Fifth, the frequency of upward regular price revisions and the frequency of sales are significantly correlated with the macroeconomic environment, in particular indicators associated with a labor market, while other components of price changes are not.     

Do farmers get a greater return from selling their agricultural products through e-commerce?

E-commerce allows farmers to cut out intermediaries and sell agricultural products to consumers directly. This raises the question of whether farmers get a greater return when they use e-commerce to sell their products than when they use conventional marketing channels (i.e., intermediaries). To answer this question, we collected rural household data on sales of agricultural products from Zhejiang and Shandong provinces, in which we selected pairs of villages where e-commerce was advanced and villages where e-commerce was less advanced and households in each village that used or did not use e-commerce. We employed a fixed effects model to investigate the impacts of e-commerce on the selling prices and marketing costs of agricultural products. The model results revealed that compared with the conventional marketing channel through intermediaries, the marketing costs through the e-commerce channel significantly increased, but the selling price increases much more, which results in increases in gross returns for farmers. The increases in selling prices and marketing costs using e-commerce varied among agricultural products and between different qualities of the same product. It has important policy implications for improving farmers’ incomes and agricultural marketing channels in developing countries.     

RAMSEY TAXES MEET PRICE RIGIDITY

‘Ramsey taxes’ are commodity taxes that minimize deadweight loss. Evidence has shown dramatic differences in the extent of price rigidity across goods: while the prices of some goods change frequently, the prices of other goods seldom change. This paper examines Ramsey taxes in the presence of heterogeneous price rigidity. We find that, to minimize deadweight loss, lower (higher) tax rates should be imposed on goods with rigid prices if their relative prices are too high (low) relative to the would‐be situation of no price stickiness. Intuitively, Ramsey taxes remedy the relative price distortion caused by the price rigidity of some goods. We calibrate our model to data from Taiwan and the USA, showing a significant cut in welfare cost if Ramsey rather than uniform taxes are applied.     

Markups,quality, and transport costs

This paper provides new evidence on trade prices based on firm-level data from France. It shows that firms charge higher free-on-board (net of transportation costs, hereafter noted as fob) unit values on exports to more distant countries. This finding holds within firms and products, and across destinations. The price premium paid by distant consumers is due to firms charging higher fob prices, and to higher transportation costs. A simple decomposition of the elasticity of import prices to distance shows that, after a fall in transport costs, almost 80% of the decline in import prices enjoyed by consumers is due to firms charging lower fob prices. This suggests a new channel through which changes in transport costs may affect welfare.     

Housing price fluctuations and financial risk transmission: a spatial economic model

Financial risk derived from housing price fluctuations in China garnered much public concern recently. Based on the theoretical analyses of the transmission of financial risk from housing price fluctuations, this paper establishes panel spatial Durbin models to empirically analyse housing price fluctuations and financial risks transmission from a spatial economic perspective. Employing the panel provincial data from 1999–2015, we conduct an analysis on the 30 provinces in China as well as a comparison among the Eastern, Middle and Western regions of China. The results indicate that: (1) The soaring housing prices driven by bank credit, real estate developers’ heavy investment, local governments’ land revenue and individuals and households demands leads to financial risk in various sectors; (2) due to the ‘substitution effect’, the capital agglomeration in metropolis from bank credits, real estate developers, and individuals and households furthers the amassment of financial risks; (3) housing prices have a significant spatial contagion effect throughout the country, and financial risk could directly transmit across provinces through housing price fluctuations; (4) financial risks could indirectly transmit across provinces via the ‘imitative behaviour’ or ‘driving effect’ of different sectors for different regions of China.