ABSTRACT
Prices that households pay for consumer goods should not be very different across a pair of markets if those markets are well integrated. “Integration” means that barriers to commerce of all sorts — formal trade barriers, transportation costs, exclusivity of distribution networks, etc. — are low. Engel and Rogers (1996) (hereinafter referred to as ER) examined prices across a number of North American cities in an attempt to assess the integration of Canadian and American markets for goods. Their finding was that the markets were not as well integrated as one might have expected. Cities within each country showed much greater harmony in prices even if they were very distant markets compared to pairs of cities that lie across the U.S.—Canada border, even if the cities were nearby geographically. There was, in the words of that study, a large “border” effect.
