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THE LAW OF ONE PRICE WITHOUT THE BORDER: THE ROLE OF DISTANCE VERSUS STICKY PRICES

Mario J. Crucini, Mototsugu Shintani and Takayuki Tsuruga
The Economic Journal
Vol. 120, No. 544, CONFERENCE PAPERS (MAY 2010), pp. 462-480
Published by: Wiley on behalf of the Royal Economic Society
Stable URL: http://www.jstor.org/stable/27765782
Page Count: 19
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Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
THE LAW OF ONE PRICE WITHOUT THE BORDER: THE ROLE OF DISTANCE VERSUS STICKY PRICES
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Abstract

We build a single-country, two-city, model with nominal rigidities and transport costs which predicts that variation of LOP deviations is lower for goods with infrequent price adjustment after controlling for distance. We adapt the Engel and Rogers (1996) regression to analyse Japanese retail prices at the city level and find that results are consistent with the theoretical predictions. The regression results also suggest that the distance equivalent of nominal rigidities can be as large as the 'width' of the border found in the literature on international LOP, casting doubt on casual interpretations of distance as a metric for market segmentation.

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