Price dispersion and the stability of trade*

Abstract

Research on trade relationships has documented a high rate of relationship breakup and churning.We use data on Norwegian exports to document two stylized facts about the stability of traderelationships. First, the probability of relationship breakup increases in the deviation of therelationship-specific price from a reference price. Second, relationship hazards follow Zipf’slaw. We propose a search model with limited information and search frictions to explainthese facts. Reference prices provide information on outside trade options that inform optimalbreakups, leading to the first stylized fact. Strong heterogeneity in breakup frictions acrossrelationships can explain the Zipf’s law hazards