Exaggerated death of distance: Revisiting distance effects on regional price dispersions

• Published in: Journal of international economics Vol. 90; no. 2; pp. 403 - 413
• Main Authors: Kano, Kazuko, Kano, Takashi, Takechi, Kazutaka
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier B.V 01.07.2013; Elsevier Sequoia S.A
• Subjects: Agricultural wholesale price; Cost estimates; Economic models; Economic theory; Geographical distance; Japan; Law of one price; Management science; Price differentiation; Price elasticity; Price theory; Price variance; Regional price dispersion; Sample-selection bias; Structural economics; Studies; Transport cost; Transport costs; Transportation problem (Operations research); Japan; F41; F11; F14; Law of one price; Regional price dispersion; Transport cost; Sample-selection bias; Geographical distance; Agricultural wholesale price
• ISSN: 0022-1996; 1873-0353
• DOI: 10.1016/j.jinteco.2013.02.002

This paper empirically establishes the significant roles of transport costs in price dispersions across regions. We identify and estimate the iceberg-type distance-elastic transport costs as a parameter of a structural model of cross-regional price differentials featuring product delivery decisions. Utilizing a data set of wholesale prices and product delivery patterns of agricultural products in Japan, our structural estimation approach finds large distance elasticities of the transport costs. The result confirms that geographical barriers are an economically significant contributor to the failures of the law of one price. ► We investigate daily data of wholesale prices of agricultural products in Japan. ► We model the product delivery patterns and regional price differentials in the data. ► Ignoring delivery choices biases downwardly distance effects on price differentials. ► We estimate a sample-selection model imposing the model's theoretical restrictions. ► We find much larger estimates of the distance elasticity of price differential.