Price Convergence among Indian Cities: The Role of Linguistic Differences, Aggregation, and topography.
Description
This study examined the validity of the Law of One Price (LOP), using goods level monthly retail price data from the linguistically and topographically diverse India. The recent confluence of high growth rate and moderate inflation in India provides a unique test case to analyze the influence of communication costs and transportation costs on market integration and price convergence. Using panel unit root tests, we found that lower communication costs due to commonly spoken languages, and lower transportation costs resulting either from shorter geographic distances or lower variations in topographical features across locations, resulting in faster rates of price convergence. We also observed signs of “aggregation bias” in the convergence of Indian prices.
Price Convergence among Indian Cities: The Role of Linguistic Differences, Aggregation, and topography.
This study examined the validity of the Law of One Price (LOP), using goods level monthly retail price data from the linguistically and topographically diverse India. The recent confluence of high growth rate and moderate inflation in India provides a unique test case to analyze the influence of communication costs and transportation costs on market integration and price convergence. Using panel unit root tests, we found that lower communication costs due to commonly spoken languages, and lower transportation costs resulting either from shorter geographic distances or lower variations in topographical features across locations, resulting in faster rates of price convergence. We also observed signs of “aggregation bias” in the convergence of Indian prices.