Violating the law of one price: Should we make a federal case out of it?

We use new disaggregated data on consumer prices to determine why there is variability in prices of similar goods across U.S. cities. We address quest ions similar to those that have arisen in the international context: is thi s variability purely a result of market segmentation or do sticky nominal p rices play a role? We also examine how the degree of tradability of a good influences price variability. Surprisingly, we find that variability is lar ger for traded goods. We attribute this finding to greater price stickiness for nontraded goods. Distance between cities accounts for a significant am ount of the variation in prices between pairs of cities. But we also find t hat nominal price stickiness plays an even more significant role.