The price of distance: pricing-to-market and geographic barriers

Information frictions in trade

Kazuko Kano, Takashi Kano and Kazutaka Takechi

Journal of Economic Geography, 2022, vol. 22, issue 4, 873-899

Abstract: Trade costs contribute to price differentials across geographically separated regions. However, when using price differential data, the identification of distance-elastic trade costs depends on how producers set prices in remote markets. To address this problem, we first empirically demonstrate that a variable markup model is more relevant than a constant markup model to describe the data variation. We then adopt a nonhomothetic preference framework to consider pricing-to-market and self-selection bias to pin down the distance effect. If these factors are not accounted for, the distance elasticity of trade costs is small. However, by incorporating these mechanisms, our empirical analysis using micro-level data reveals that the distance effect is significantly large, suggesting that the price of geographic barriers to regional trade is high.

Keywords: Trade costs; geographic barriers; sample selection; pricing-to-market (search for similar items in EconPapers)
JEL-codes: F12 F14 F41 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (1)

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