Non-monotonic cross-price effects: The impact of intensive and extensive margins in cross-border shopping
Abstract: This paper examines the effect of cross-border shopping on grocery demand in Norway using store-level sales data from Norway's largest grocery chain 2011-2016. The sensitivity of demand to foreign price is hump-shaped and greatest 30-60 minutes from the closest foreign stores. Combining continuous demand, fixed costs of cross-border shopping and linear transport costs à la Hotelling we show how this hump-shape can arise through a combination of intensive and extensive margins of cross-border shopping. Our conclusions are further supported by novel survey evidence and cross-border traffic data.