Broda and Weinstein’s new paper on international price differences tells us the source of country price dispersion between US and Canada
They study this via UPCs obtained from AC Neilsen. The first key result is that UPCs sold in BOTH the US cities and Canadian regions follow the LOOP relatively well. The other key result is that common UPCs is quite small. For the US city pairs, the highest pair with w NY-Phili, with only 30% in common. The further the city pairs are to each other, the lower the fraction of common UPCs are: about 15% for LA-NY.
For US-Canada pairs, the slope of the distance-common UPCs line is flat — no matter what the distance is, the range is from 5% to almost 10%.
For Canada pairs, the range is wider (from 33% to 55% common UPCs), and the minimum is much higher than the maximum of the US city pairs.
These results are consistent with higher price variation within the US vs Canada. Broda/Weinstein say that the fact that common UPCs are smaller for cross-border pairs is the key reason why we observe deviations from LOOP in aggregated prices cross border. This is the result of Tesar and Gorodnichenko also, although they don’t know why the variation would be different.
Broda-Weinstein move this debate one step forward — now we know why Canada deviation is different from US variation in prices. Its about what UPCs are sold where. The next question is — why is product variety so different? One guesses that this is about retailers and manufacturers price discriminating via changing the goods characteristics. Examples: eggs can be large, medium and small, come in several pack sizes, free range or not, etc. BW report that fresh eggs have 2,275 possible varieties, while the ‘typical’ group has about 2,700 varieties.
Also, among US cities, the composition of goods is different, and is more different the further away, the more different it is. For Boston-LA, about 2,700 miles, the common UPCs are only 17%, while for Boston-NY, distance of 230 miles, the common UPCs are 24%. What is the source of this non-integration/State-City Bias?
