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

Kazuko Kano, Takashi Kano, Kazutaka Takechi*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

1 Citation (Scopus)

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.

Original languageEnglish
Pages (from-to)873-899
Number of pages27
JournalJournal of Economic Geography
Volume22
Issue number4
DOIs
Publication statusPublished - 2022 Jul 1

Keywords

  • Geographic barriers
  • Pricing-to-market
  • Sample selection
  • Trade costs

ASJC Scopus subject areas

  • Geography, Planning and Development
  • Economics and Econometrics

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