Within-Country Price Dispersion: Evidence from the United States and China

Abstract

Using individual retail prices of goods and services in China and the U.S., we examine the factors driving price dispersion and how they evolve within a country, where the border effect is absent. We find that the key difference in within-country price dispersion between China and the U.S. stems from the impact of arbitrage costs rather than the inherent characteristics of the items. In the U.S., price dispersion is largely driven by both oil prices and income differences, while in China, income differences play the dominant role. These effects become increasingly pronounced over time. We also find evidence of asymmetric effects of oil price shocks in the U.S., with negative shocks being more significant and larger in impact. This study highlights the importance of the heterogeneous evolution of factors driving price dispersion within a country.