Local costs of distribution, international trade costs and micro evidence on the law of one price

► This paper accounts for the observed cross‐country dispersion in prices of goods. ► Two sources of price dispersion - trade costs and local distribution costs. ► Uses a multi‐sector Ricardian trade model with distribution costs. ► Accounts for average price dispersion for a basket of goods fully. ► Accounts for 70% of variation in price dispersion across goods within the basket.