Price Level Convergence Among Danish Cities and Retailers
The purpose of this project is to analyze price convergence between regions/cities/retailers in the Danish economy. Earlier literature on the Law of One Price (LOOP) compares price movements across international borders and finds that there are deviations from LOOP that are fairly persistent. To get a better understanding of the sources of these deviations from LOOP, we focus on inter-city price differentials within the Danish economy where trade barriers are expected to be lower than in monetary unions and where the influence from the nominal exchange rate is eliminated. Our innovation is that we are not only analyzing price convergence between cities but also price convergence between individual items sold at different retailers in the same city. In this respect, our study extends earlier literature on intercity price level differentials. To our best knowledge, there are no earlier papers analyzing these issues. A central theme is to examine how goods prices on individual goods converge to a common price level. There are a number of issues that are of interest in our study, in particular if there are structural differences between types of goods, the degree of price stickiness, the degree of competition and price setting behavior, i.e., whether firms use statedependent or time-dependent pricing.