Pricing-to-Market and the Failure of Absolute PPP

We show that deviations from the law of one price in tradable goods are an important source of violations of absolute PPP across countries. Using highly disaggregated export data, we document systematic international price discrimination: at the U.S. dock, U.S. exporters ship the same good to low-income countries at lower prices. This pricing-to-market is about twice as important as any local non-traded inputs, such as distribution costs, in explaining the differences in tradable prices across countries. We propose a model of consumer search that generates pricing-to-market. In this model, consumers in low-income countries have a comparative advantage in producing non-traded, non-market search activities and therefore are more price sensitive than consumers in high-income countries. We present cross-country time use evidence and evidence from U.S. export prices that are consistent with the model. (JEL E31, F12)