The Microeconomics of International Price Dispersion

This dissertation investigates the reasons behind international price dispersion. The first essay, International Price Dispersion and the Direction of Trade, discusses the importance of trade cost as a determinant of international price dispersion. The importance of trade costs in segmenting product markets can not be captured by considering aggregate prices or in the absence of information on the direction of trade. The first essay, addresses this problem by utilizing product-specific prices along with cross-sectional productivity measures and bilateral trade flows that allow us to identify the probable source of any one product. The empirical approach used in this work is in line with the theoretical framework of Eaton and Kortum (2002) and the variation of this model proposed in Anderson and van Wincoop (2004). The data are shown to be consistent with this framework. In particular, trade costs in the form of transportation and distribution costs are important in determining international price differences and segmenting international markets.The second essay, International Price Dispersion and Market Structure investigates the effect of market structure on absolute price differences. Cheung, Chinn and Fuji (1999) argue that, monopolistic firms pricing power is determined by the elasticity of demand which depends on the substitutability among varieties within the industry. Therefore, product differentiation creates more dispersed prices and it can be a sign of market power. In this essay, market structure is controlled by using the product classification proposed by Rauch (1999). Specifically, the data is divided into two separate good categories as homogeneous goods and differentiated goods. The results presented in this chapter demonstrate that the effect of potential determinants of international price dispersion differs substantially for different product types.