Behavior of Retail Prices: A Note on Market Integration in the U.S.

This essay tests a dynamic version of the law-of-one-price for U.S. retail markets. The sample consists of retail price differences for a 43-year period over five U.S. cities for various commodity groups. Since relative transportation costs are declining, the law-of-one-price predicts that the retail prices for each of the product groups in the five cities should converge. Some reasonable alternative hypotheses, however, predict that prices should diverge. The statistical analysis shows that the various factors under consideration are roughly offsetting so that no marked trends in price variation over space are observable.