IDEAS home Printed from https://ideas.repec.org/p/hit/econdp/2012-01.html
   My bibliography  Save this paper

Exaggerated Death of Distance: Revisiting Distance Effects on Regional Price Dispersions

Author

Listed:
  • Kano, Kazuko
  • 加納, 和子
  • Kano, Takashi
  • 加納, 隆
  • Takechi, Kazutaka
  • 武智, 一貴

Abstract

Past studies in the literature of the law of one price (LOP) show statistically significant but economically subtle roles of geographical distance in regional price dispersions. In this paper, we challenge this empirical "death of distance" as a primary source of LOP violations investigating a unique daily data set of wholesale prices of agricultural products in Japan that enables us to identify source regions and observe product-delivery patterns to consuming regions. We build a simple structural model to explain the observed product-delivery patterns and argue that ignoring the underlying delivery choice results in a serious under-bias toward inferences on distance effects on regional price dispersions due to sample selection. Estimating a sample-selection model, on which theoretical restrictions of our structural model are imposed, with data of several agricultural products, we find quite large estimates of the distance elasticity of price differential compared with conventional estimates. This paper, hence, provides evidence that conventional estimates of the distance elasticity could be heavily biased downwards and spuriously underestimate the role transportation costs play in regional price dispersions and LOP violations.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Kano, Kazuko & 加納, 和子 & Kano, Takashi & 加納, 隆 & Takechi, Kazutaka & 武智, 一貴, 2012. "Exaggerated Death of Distance: Revisiting Distance Effects on Regional Price Dispersions," Discussion Papers 2012-01, Graduate School of Economics, Hitotsubashi University.
    • Handle: RePEc:hit:econdp:2012-01
    as

    Download full text from publisher

    File URL: https://hermes-ir.lib.hit-u.ac.jp/hermes/ir/re/22973/070econDP12-01.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Andrew Atkeson & Ariel Burstein, 2008. "Pricing-to-Market, Trade Costs, and International Relative Prices," American Economic Review, American Economic Association, vol. 98(5), pages 1998-2031, December.
    2. Midrigan, Virgiliu, 2007. "International price dispersion in state-dependent pricing models," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2231-2250, November.
    3. Christian Broda & David E. Weinstein, 2008. "Understanding International Price Differences Using Barcode Data," NBER Working Papers 14017, National Bureau of Economic Research, Inc.
    4. Andrew B. Bernard & Jonathan Eaton & J. Bradford Jensen & Samuel Kortum, 2003. "Plants and Productivity in International Trade," American Economic Review, American Economic Association, vol. 93(4), pages 1268-1290, September.
    5. James E. Anderson & Eric van Wincoop, 2004. "Trade Costs," Journal of Economic Literature, American Economic Association, vol. 42(3), pages 691-751, September.
    6. Balistreri, Edward J. & Hillberry, Russell H. & Rutherford, Thomas F., 2011. "Structural estimation and solution of international trade models with heterogeneous firms," Journal of International Economics, Elsevier, vol. 83(2), pages 95-108, March.
    7. Engel, Charles & Rogers, John H, 1996. "How Wide Is the Border?," American Economic Review, American Economic Association, vol. 86(5), pages 1112-1125, December.
    8. James E. Anderson & Eric van Wincoop, 2003. "Gravity with Gravitas: A Solution to the Border Puzzle," American Economic Review, American Economic Association, vol. 93(1), pages 170-192, March.
    9. Fabio Ghironi & Marc J. Melitz, 2005. "International Trade and Macroeconomic Dynamics with Heterogeneous Firms," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 120(3), pages 865-915.
    10. Engel, Charles & Rogers, John H., 2001. "Deviations from purchasing power parity: causes and welfare costs," Journal of International Economics, Elsevier, vol. 55(1), pages 29-57, October.
    11. Charles Engel & John H. Rogers & Shing-Yi Wang, 2003. "Revisiting the Border: an assessment of the law of one price using very disaggregated consumer price data," International Finance Discussion Papers 777, Board of Governors of the Federal Reserve System (U.S.).
    12. Hummels, David, 1999. "Toward a Geography of Trade Costs," Working papers 283448, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    13. Hummels, David, 1999. "Toward a Geography of Trade Costs," GTAP Working Papers 1162, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University.
    14. Paul R. Bergin & Reuven Glick, 2017. "Endogenous Tradability and Some Macroeconomic Implications," World Scientific Book Chapters, in: International Macroeconomic Interdependence, chapter 7, pages 187-210, World Scientific Publishing Co. Pte. Ltd..
    15. Janet Ceglowski, 2003. "The law of one price: intranational evidence for Canada," Canadian Journal of Economics, Canadian Economics Association, vol. 36(2), pages 373-400, May.
    16. Ozlem Inanc & Marios Zachariadis, 2012. "The Importance Of Trade Costs In Deviations From The Law-Of-One-Price: Estimates Based On The Direction Of Trade," Economic Inquiry, Western Economic Association International, vol. 50(3), pages 667-689, July.
    17. MarioJ. Crucini & Mototsugu Shintani & Takayuki Tsuruga, 2010. "The Law of One Price without the Border: The Role of Distance versus Sticky Prices," Economic Journal, Royal Economic Society, vol. 120(544), pages 462-480, May.
    18. Newey, Whitney K., 1987. "Efficient estimation of limited dependent variable models with endogenous explanatory variables," Journal of Econometrics, Elsevier, vol. 36(3), pages 231-250, November.
    19. Baba, Chikako, 2007. "Price dispersion across and within countries: The case of Japan and Korea," Journal of the Japanese and International Economies, Elsevier, vol. 21(2), pages 237-259, June.
    20. Matthieu Crozet & Pamina Koenig, 2010. "Structural gravity equations with intensive and extensive margins," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 43(1), pages 41-62, February.
    21. Carolyn L. Evans & James Harrigan, 2003. "Distance, time, and specialization," International Finance Discussion Papers 766, Board of Governors of the Federal Reserve System (U.S.).
    22. Ben S. Bernanke & Kenneth S. Rogoff (ed.), 2001. "NBER Macroeconomics Annual 2000," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262523140, April.
    23. David C. Parsley & Shang-Jin Wei, 1996. "Convergence to the Law of One Price Without Trade Barriers or Currency Fluctuations," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 111(4), pages 1211-1236.
    24. Anne-Célia Disdier & Keith Head, 2008. "The Puzzling Persistence of the Distance Effect on Bilateral Trade," The Review of Economics and Statistics, MIT Press, vol. 90(1), pages 37-48, February.
    25. Andrew B. Bernard & J. Bradford Jensen, 2004. "Entry, Expansion, and Intensity in the US Export Boom, 1987–1992," Review of International Economics, Wiley Blackwell, vol. 12(4), pages 662-675, September.
    26. Mario Crucini & Chris Telmer & Marios Zachariadis, 2003. "Price dispersion: The role of distance, borders and location," GSIA Working Papers 2004-E25, Carnegie Mellon University, Tepper School of Business.
    27. Ben S. Bernanke & Kenneth Rogoff, 2001. "NBER Macroeconomics Annual 2000, Volume 15," NBER Books, National Bureau of Economic Research, Inc, number bern01-1.
    28. Johnson, Robert C., 2012. "Trade and prices with heterogeneous firms," Journal of International Economics, Elsevier, vol. 86(1), pages 43-56.
    29. Donaldson, Dave, 2010. "Railroads of the Raj: estimating the impact of transportation infrastructure," LSE Research Online Documents on Economics 38368, London School of Economics and Political Science, LSE Library.
    30. Dave Donaldson, 2010. "Railroads of the Raj: Estimating the Impact of Transportation Infrastructure," NBER Working Papers 16487, National Bureau of Economic Research, Inc.
    31. Rivers, Douglas & Vuong, Quang H., 1988. "Limited information estimators and exogeneity tests for simultaneous probit models," Journal of Econometrics, Elsevier, vol. 39(3), pages 347-366, November.
    32. Maurice Obstfeld & Kenneth Rogoff, 2001. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," NBER Chapters, in: NBER Macroeconomics Annual 2000, Volume 15, pages 339-412, National Bureau of Economic Research, Inc.
    33. Elhanan Helpman & Marc Melitz & Yona Rubinstein, 2008. "Estimating Trade Flows: Trading Partners and Trading Volumes," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 123(2), pages 441-487.
    34. Janet Ceglowski, 2003. "The law of one price: intranational evidence for Canada," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 36(2), pages 373-400, May.
    35. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
    36. Vella, Francis & Verbeek, Marno, 1999. "Two-step estimation of panel data models with censored endogenous variables and selection bias," Journal of Econometrics, Elsevier, vol. 90(2), pages 239-263, June.
    37. Carolyn L. Evans & James Harrigan, 2005. "Distance, Time, and Specialization: Lean Retailing in General Equilibrium," American Economic Review, American Economic Association, vol. 95(1), pages 292-313, March.
    38. Rogers, John H. & Jenkins, Michael, 1995. "Haircuts or hysteresis? Sources of movements in real exchange rates," Journal of International Economics, Elsevier, vol. 38(3-4), pages 339-360, May.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Kano, Kazuko & 加納, 和子 & Kano, Takashi & 加納, 隆 & Takechi, Kazutaka & 武智, 一貴, 2013. "The Price of Distance: Producer Heterogeneity, Pricing to Market, and Geographic Barriers," Discussion Papers 2013-03, Graduate School of Economics, Hitotsubashi University.
    2. Kazuko Kano & Takashi Kano & Kazutaka Takechi, 2012. "Nonparametric Identification and Estimation of the Number of Components in Multivariate Mixtures," Global COE Hi-Stat Discussion Paper Series gd12-246, Institute of Economic Research, Hitotsubashi University.
    3. KANO Kazuko & KANO Takashi & TAKECHI Kazutaka, 2015. "The Price of Distance: Pricing to market, producer heterogeneity, and geographic barriers," Discussion papers 15017, Research Institute of Economy, Trade and Industry (RIETI).
    4. Magerman, Glenn & Studnicka, Zuzanna & Van Hove, Jan, 2016. "Distance and border effects in international trade: A comparison of estimation methods," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 10, pages 1-31.
    5. Head, Keith & Mayer, Thierry, 2014. "Gravity Equations: Workhorse,Toolkit, and Cookbook," Handbook of International Economics, in: Gopinath, G. & Helpman, . & Rogoff, K. (ed.), Handbook of International Economics, edition 1, volume 4, chapter 0, pages 131-195, Elsevier.
    6. Costinot, Arnaud & Rodríguez-Clare, Andrés, 2014. "Trade Theory with Numbers: Quantifying the Consequences of Globalization," Handbook of International Economics, in: Gopinath, G. & Helpman, . & Rogoff, K. (ed.), Handbook of International Economics, edition 1, volume 4, chapter 0, pages 197-261, Elsevier.
    7. Kristian Behrens & Giordano Mion & Yasusada Murata & Jens Südekum, 2014. "Trade, Wages, And Productivity," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 55(4), pages 1305-1348, November.
    8. Melitz, Marc J. & Redding, Stephen J., 2014. "Heterogeneous Firms and Trade," Handbook of International Economics, in: Gopinath, G. & Helpman, . & Rogoff, K. (ed.), Handbook of International Economics, edition 1, volume 4, chapter 0, pages 1-54, Elsevier.
    9. Balaguer, Jacint & Ripollés, Jordi, 2018. "Disentangling the importance of international border effects. Some evidence from Portugal–Spain based on diesel retailers," Economic Modelling, Elsevier, vol. 72(C), pages 260-269.
    10. A. Kerem Cosar & Paul L. E. Grieco & Felix Tintelnot, 2015. "Borders, Geography, and Oligopoly: Evidence from the Wind Turbine Industry," The Review of Economics and Statistics, MIT Press, vol. 97(3), pages 623-637, July.
    11. Mario Larch & Wolfgang Lechthaler, 2011. "Why `Buy American' is a bad idea but politicians still like it," Canadian Journal of Economics, Canadian Economics Association, vol. 44(3), pages 838-858, August.
    12. David Fielding & Christopher Hajzler & James Macgee, 2015. "Distance, Language, Religion, and the Law of One Price: Evidence from Canada and Nigeria," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(5), pages 1007-1029, August.
    13. Whalley, John & Xin, Xian, 2009. "Home and regional biases and border effects in Armington type models," Economic Modelling, Elsevier, vol. 26(2), pages 309-319, March.
    14. Yuriy Gorodnichenko & Linda Tesar, 2005. "A Re-Examination of the Border Effect," NBER Working Papers 11706, National Bureau of Economic Research, Inc.
    15. Paul Bergin & Reuven Glick, 2005. "Tradability, Productivity, and Understanding International Economic Integration," Working Papers 294, University of California, Davis, Department of Economics.
    16. Larch, Mario & Lechthaler, Wolfgang, 2011. "Is there a short-run case for protectionism? Trade policy and the business cycle," Kiel Working Papers 1717, Kiel Institute for the World Economy (IfW Kiel).
    17. Roux, Catherine & Santos-Pinto, Luís & Thöni, Christian, 2016. "Home bias in multimarket Cournot games," European Economic Review, Elsevier, vol. 89(C), pages 361-371.
    18. Cacciatore, Matteo, 2014. "International trade and macroeconomic dynamics with labor market frictions," Journal of International Economics, Elsevier, vol. 93(1), pages 17-30.
    19. Mamello A Nchake & Lawrence Edwards & Tresor N Kaya, 2019. "The Size of the Border and Product Market Integration Between Lesotho and South Africa: A Production–Consumption Approach," Journal of African Economies, Centre for the Study of African Economies, vol. 28(1), pages 70-88.
    20. Mario Larch & Wolfgang Lechthaler, 2013. "Whom to send to Doha? The Short-sighted Ones!," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(4), pages 634-649, October.

    More about this item

    Keywords

    Law of one price; Regional price dispersion; Transport cost; Geographical distance; Agricultural wholesale price; Sample-selection bias;
    All these keywords.

    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hit:econdp:2012-01. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Digital Resources Section, Hitotsubashi University Library (email available below). General contact details of provider: https://edirc.repec.org/data/fehitjp.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.