Exaggerated Death of Distance: Revisiting Distance Effects on Regional Price Dispersions (Revised in May 2012)

Abstract

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 dierentials 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.