for the Nakamura and Steinsson study and every 4.5 months for the study carried out by Kehoe and Midrigan.

Prices in some markets may be slow to change compared to costs because the physical good may only be a relatively small part of the unit costs. When this is the case, the buyer also pays for additional services (marketing or/and advertisement) and local costs (wage, labor, local taxes, local transportation services, retail services). These additional costs may be substantial compared to the unit cost of the physical good (Burstein et al. 2003). This implies that even a significant increase in the unit cost of an imported factor of production or in wholesale prices may increase retail prices by only a small fraction of total costs (Burstein et al., 2003; Burstein et al., 2007; Goldberg and Campa, 2010; and Nakamura and Zerom, 2010). For example, Goldberg and Hellerstein (2008) indicate that response of prices to exchange rates in the beer industry is small mainly because of local costs that are responsible for approximately half of the observed inertia of retail prices. So even though changes in exchange rates should affect the price of beer bought and sold internationally, changes in retail prices do not reflect changes in exchange rates.

# Behavior of consumer prices in Mexico

A few studies for Mexico analyze prices from a microdata perspective. One particular finding in some of these studies is the asymmetry between the frequency of upward and downward price changes, with upward movements being more common, suggesting some inefficiencies in price adjustments (Gagnon, 2009 and Ysusi, 2010). Vaughan (2013) finds some evidence of market integration in the form spatial correlation of cities’ price indexes for the same good, but this only holds in the presence of structural breaks (i.e., a change of indexes from nonstationary to stationary processes); once a structural change takes place, cities’ prices seem to be driven by internal (idiosyncratic) factors rather than spatially or regionally. Finally, Gagnon (2006) identifies that in periods of low inflation (below 10-15%), such as during our sample period,<sup>7</sup> the adjustment in inflation is mostly driven by the average magnitude of price changes rather than by the frequency of changes. The frequency of changes plays almost no role in such adjustment.

# Effects of the entry of a large retailer on prices

There is documented evidence on the effect the entry of a large retailer has on retail prices. Basker (2005) and Fishman (2006) indicate that Wal-Mart charges lower prices in the markets it enters, inducing other retailers to reduce their prices too. Thus, a possible consequence of higher competition is a lower price dispersion. Fishman (2006) also hints at the possibility of a reduction in price volatility when Wal-Mart enters a market, because it smooths fluctuations in the seasonality of some goods’ prices. Relatedly, Atkin et al. (2015) find that the arrival of global retail chains has led to welfare gains in average Mexican households, mainly driven by reductions in the costs of living.

# DATA

To identify and describe how prices for certain well-specified commodities function across time and space for markets across Mexico, we look at price dispersion, price pass-through and price volatility temporally and geographically. To explain how these dimensions were

> 7 The highest annual CPI inflation level in our sample is 4.97%.

6