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The Price of Distance: Producer Heterogeneity,
Pricing to Market, and Geographic Barriers
Abstract
This study investigates the effect of distance on price differentials across regions. To identify the distance effect, we need to incorporate producer heterogeneity and pricing-to-market behavior. Because geographic barriers alter the threshold levels of productivity to set a positive price across markets, the effect of distance on price differentials can be underestimated if heterogeneity and pricing to market are not accounted for. By incorporating these factors, empirical analysis using micro-level data reveals that the distance effect is significantly large, suggesting that the price of geographic barriers is still high for regional transportation.
