This paper presents a theoretical argument that the relationship between price differences and per capita demand differences (approximated by per capita income differences) across locations can be used as a cross-sectional test of the law of one price. Since the relationship should be statistically insignificant or very weak in an integrated economy, its strength can measure the extent of market integration. Using this approach, the temporal pattern of Russia's internal market integration is characterized. The data used span 1992 – 1999, and cover most regions of the country; a number of consumer goods and aggregates are included in the analysis. The price-income relationship is found to be strong over the whole time span considered, thus indicating that the Russian market is not near to being integrated even in the present day. Nevertheless, integration tends to improve over time, though there are deviations from this tendency in 1997 and 1999. A number of culprits behind market fragmentation are identified, organized crime among them.
Russia, law of one price, market integration, price dispersion, Russian regions
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