Pricing-to-Market and the Failure of Absolute PPP

Using highly disaggregated export data, the authors 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. The authors 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. The authors present cross-country time use evidence and evidence from U.S. export prices that are consistent with the model.