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Price dispersion and the stability of trade

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  • Atle Oglend
  • Frank Asche
  • Ruth Beatriz Mezzalira Pincinato
  • Hans‐Martin Straume

Abstract

Research on trade relationships has documented a high rate of relationship breakup and churning. We use data on Norwegian exports to document two stylized facts about the stability of trade relationships. First, the probability of relationship breakup increases in the deviation of the relationship‐specific price from a reference price. Second, relationship hazards follow Zipf's law. We propose a search model with limited information and search frictions to explain these facts. Reference prices provide information on outside trade options that inform optimal breakups, leading to the first stylized fact. Strong heterogeneity in breakup frictions across relationships can explain the Zipf's law hazards.

Suggested Citation

  • Atle Oglend & Frank Asche & Ruth Beatriz Mezzalira Pincinato & Hans‐Martin Straume, 2023. "Price dispersion and the stability of trade," Scandinavian Journal of Economics, Wiley Blackwell, vol. 125(3), pages 789-820, July.
    • Handle: RePEc:bla:scandj:v:125:y:2023:i:3:p:789-820
    DOI: 10.1111/sjoe.12526
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