marginal effect is stronger than for retail markets. The result hints that improving connectivity could imply a more drastic reduction in price dispersion than in retail markets. An alternative reading of these results suggests that a reduction of 1 hour driving lowers price dispersion by 0.42 percentage points. As mentioned above, travel time reductions could be achieved both through the improvement of the road and railway networks, and through the reduction of other costs associated with traveling within India, including those related to inter‐state border controls, or those arising due to imperfectly competitive transport and distribution sectors (see World Bank, 2016 “Improving Supply Chain and Domestic Connectivity in India”, for an assessment of the constraints to efficient logistics in the country).

Information frictions impede integration of wholesale markets in India: a 1 percent increase in wireless phone penetration displays the same marginal effect as a reduction in distance of 230 km. Wireless phone penetration has an even stronger marginal effect than distance. A 1‐percentage point increase in cellular penetration, is associated with an effect between 3 and 11 percentage points in price dispersion, depending on the specification. The strong effect of information technologies is consistent with previous findings in the literature that point as information frictions as one of the most important barriers for price integration. These results suggest that increasing the network of cell phone coverage could help reduce informational asymmetries and allow market players to make better informed decisions about production and trade, thus exhausting arbitrage opportunities. Although not formally tested, it is likely that internet penetration plays a similar role as it is a powerful vehicle for information diffusion.

Nominal frictions, specifically, price stickiness, play a role in explaining departures from the law of one price. Increasing price stickiness by 1 percentage point is associated with a 0.3 percentage points increase in price differences with respect to Delhi. This result implies that menu costs are in partly responsible of price differences in India. The result goes in line with the study of Crucini (2010) in Japan, which shows that price stickiness is one of the factors explaining the departures from the law of one price between Japanese cities.

The best model explains 70% of the total variance, which is more than twice of the explanatory power achieved in the retail analysis. The higher fit of the model suggests that wholesale markets are more sensitive to changes in fundamentals. The lack of explanatory power of the retail model may be explained by the fact that the lack of integration in wholesale markets directly affects integration in retail markets (as the two markets are strongly linked, as discussed in Section 3).

The law of one price does not hold in wholesale markets for all commodities. However, when testing product by product, for mustard oil and wheat the law of one price hypothesis is upheld. Just like in the case of departures from the law of one price in retail, results for wholesale suggest that there are unobservable factors that impede integration.

# Border effect

How costly is it to cross state borders in India pre‐GST? What do these borders imply in terms of deviations from the law of one price? Typically, the question of crossing borders has been studied in the case of international borders rather than intra‐national ones. However, India is a federal country, and during the period of analysis (i.e.: prior to the implementation of GST in July 2017), states often behaved like separate countries, exporting and importing from each other in a similar manner to international trade. At state borders, this resulted in state border authority checks on both parts of the border levying taxes, conducting road transport checks and commodity specific taxes.

Recent studies have pointed to how disruptive state‐border controls were in India. A recent World Bank survey conducted among 70 manufacturing companies revealed that one of the major reasons for freight delays is related with state border check‐post clearances, in addition to infrastructure 35