International price dispersion and the direction of trade

Abstract

The importance of trade costs in segmenting product markets cannot be captured by considering aggregate prices or in the absence of information on the direction of trade. We address 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. Our empirical approach is in line with the theoretical framework of Eaton and Kortum (2002) and the variation of this 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.