"The bigger they are, the harder they fall": Retail price differences across US cities

This paper examines the evidence for nonlinear price behavior in retail goo ds prices across U.S. cities. First, a simple continuous-time model is used to explore the types of price behavior that can arise in the presence of m arket frictions. These frictions could be interpreted as transport costs, b ut we prefer a broader interpretation in which they operate at the level of technology and preferences. Second, we gather price data from 24 U.S. citi es on individual goods like orange juice and toothpaste. The empirical anal ysis reveals that price discrepancies between U.S. cities are stationary an d nonlinearly mean-reverting to price parity. (C) 2002 Elsevier Science B.V . All rights reserved.