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

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  • Kazuko Kano
  • Takashi Kano

    (Graduate School of Economics, University of Tokyo)

  • Kazutaka Takechi

    (Faculty of Economics, Hosei University)

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.

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Bibliographic Info

Paper provided by Finance Discipline Group, UTS Business School, University of Technology, Sydney in its series Working Paper Series with number 162.

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Length: 32
Date of creation: 01 Oct 2010
Date of revision:
Publication status: Published as: Kano, K, Kano, T.. and Takechi, K.. 2012, "Exaggerated Death of Distance: Revisiting Distance Effects on Regional Price Dispersions", Journal of International Economics, 90(2), 403-413.
Handle: RePEc:uts:wpaper:162

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Keywords: law of one price; regional price dispersion; transportation cost; geographical distance; agricultural wholesale price; sample-selection bias;

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References

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Cited by:
  1. Kano, Kazuko & Kano, Takashi & Takechi, Kazutaka, 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. Mario J. Crucini & Mototsugu Shintani & Takayuki Tsuruga, 2012. "Noisy Information, Distance and Law of One Price Dynamics Across US Cities," NBER Working Papers 17815, National Bureau of Economic Research, Inc.

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